Module 1 in AE 12 (Economic Development)

The Meaning and Measurement of Economic Development

Module Objectives:
At the end of Module 1, students are expected to discuss the following:

a) Is economic growth possible without economic development?

b) Economic development without economic growth?

c) What do you consider the most urgent goals for LDCs by 2025?

d) Why are these goals important?

e) What policy changes should LDCs undertake to increase the probability of attaining these goals?

f) Give an example of a LDC that you think has had an especially good (poor) development record
in the past two to three decades. Why did you choose this LDC?

Module 1 Overview
This module discusses the meaning, calculation, and basic indicators of economic growth and
development; the classification of rich and poor countries; the price index problem; the distortion in
comparing income per head between rich and poor countries; adjustments to income figures for
purchasing power; alternative measures and concepts of the level of economic development besides
income per head; the problems of alternative measures; and the costs and benefits of economic
development.

Growth and Development

A major goal of poor countries is economic development or economic growth. The two terms
are not identical. Growth may be necessary but not sufficient for development. Economic growth refers
to increases in a country’s production or income per capita. Production is usually measured by gross
national product (GNP) or gross national income (GNI), used interchangeably, an economy’s total
output of goods and services. Economic development refers to economic growth accompanied by
changes in output distribution and economic structure. These changes may include an improvement in
the material well-being of the poorer half of the population; a decline in agriculture’s share of GNP and a
corresponding increase in the GNP share of industry and services; an increase in the education and skills
of the labor force; and substantial technical advances originating within the country. As with children,
growth involves a stress on quantitative measures (height or GNP), whereas development draws
attention to changes in capacities (such as physical coordination and learning ability, or the economy’s
ability to adapt to shifts in tastes and technology).
 The pendulum has swung between growth and development. A major shift came near the end
of the UN’s first development decade (1960–70), which had stressed economic growth in poor
countries. Because the benefits of growth did not often spread to the poorer half of the population,
disillusionment with the decade’s progress was widespread, even though economic growth exceeded
the UN target. In 2019, Dudley Seers signaled this shift by asking the following questions about a
country’s development:

What has been happening to poverty? What has been

happening to unemployment? What has been happening to inequality?
If all three of these have become less severe, then beyond doubt this
has been a period of development for the country concerned. If one or
two of these central problems have been growing worse, especially if all
three have, it would be strange to call the result “development,” even if
per capita income has soared.

At the U.N. Millennium Summit in September 2017, world leaders adopted the Millennium
Development Goals (MDGs), setting “targets for reducing poverty, hunger, disease, illiteracy,
environmental degradation, and discrimination against women.” The project is directed by Columbia
University’s Jeffrey Sachs, with advice from senior representatives from U.N. agencies and an
International Advisory Panel, with independent experts in relevant fields, supported by the research of
thematically-orientated task forces.

The MDGs, using 1990 as a benchmark, set targets for 2015. The targets include

1. reducing the people suffering from hunger and living on less than a dollar a day from one of
six billion (17 percent) to half that proportion;

2. ensuring that all boys and girls complete primary school (at present, 113 million children do
not attend school);

3. promoting gender equality and empowering women by eliminating gender disparities in

primary and secondary education by 2005, and at all levels by 2015 (at present, two-thirds of illiterates
are women);

4. reducing by two-thirds mortality among children under five years (presently 11 million
children die before their fifth birthday, mainly from preventable illnesses);

5. reducing the percentage of women dying in childbirth by three-fourths (now one in 48 die in
childbirth, despite the fact that virtually all countries have safe programs for mothers);

6. halting and reversing the spread of HIV/AIDS, malaria, tuberculosis, and other diseases (at
present, 40 million people live with HIV, including five million newly infected in 2017, despite the fact
that Brazil, Senegal, Thailand, and Uganda show that the spread of HIV can be stemmed);

7. ensuring environmental sustainability, by reversing the loss of environmental resources,

reducing by half the proportion of people without access to safe drinking water by 2017, and achieving
significant improvement in the lives of at least 100 million slum dwellers (now “more than one billion
people lack access to safe drinking water and more than two billion lack sanitation”); and
 8. developing a global partnership for development, including an open trading and financial
system, a commitment to good governance, reducing the debt burden of developing countries, reducing
the poverty of least developed countries, providing productive employment for youth, providing access
to affordable essential drugs in developing countries, and making available the benefits of new
technologies, especially in telecommunications.

During the first decade of the 21st century, world leaders discussed how to finance projects
embodying these goals, interim progress reports, and final recommendations.

The United Nations points out development goals achieved in the past: eradicating smallpox
(1977), reducing diarrhoeal deaths by half (during the 1990s), and cutting infant mortality rates (the
annual number of deaths of infants under one year of age per 1,000 live births) to less than 120 (in all
but 12 LDCs by 2000). Thus, although most MDG goals appear daunting, we can expect some progress.

Timothy Besley and Robin Burgess estimate that in LDCs, the elasticity of poverty with respect to
income per capita (percentage change in poverty/percentage change in income per capita) is −0.73,
meaning that a doubling in average income will reduce poverty rates by 73 percent. The annual growth
rate in per capita income needed to halve world poverty by 2015 is 3.9 percent. If you assume that
world regions continue their 1960–90 growth, only the growths of East Asia and the Middle East will
exceed the rates needed to halve regional poverty by 2015.

However, Africa’s prospect is not as bright as that of the remaining LDCs. David Sahn and David
Stifel use African demographic and health surveys to examine likely progress in achieving MDG goals.
African countries are not on target to achieve any of the first six goals tested (numbers 5 and 6 include
proxies), with rural areas, where most African reside, faring worse than cities. Still, the authors find
increases in enrollment rates, declines in infant and child mortality and maternal death rates, and
(although there is no MDG goal) improved living standards in the 1990s, the baseline for projecting
linear and log-linear target paths.

The international community has especially focused upon Africa. The Economic Commission for
Africa described Africa’s economic situation in 1984 as the worst since the Great Depression, and Africa
as “the very sick child of the international economy.” ECA’s 2008 25th anniversary projection of previous
trends to 2018 envisioned the following nightmare of explosive population growth pressing on physical
resources and social services:

The socio-economic conditions would be characterized by a degradation of the

very essence of human dignity. The rural population, which would have to survive on
intolerable toil, will face an almost disastrous situation of land scarcity whereby whole
families would have to subsist on a mere hectare of land. Poverty would reach
unimaginable dimensions, since rural incomes would become almost negligible relative
to the cost of physical goods and services. The conditions in the urban centers would
also worsen with more shanty towns, more congested roads, more beggars and more
delinquents. The level of the unemployed searching desperately for the means to
survive would imply increased crime rates and misery. But, alongside the misery, there
would continue to be those very few who, unashamedly, would demonstrate an even
higher degree of conspicuous consumption. These very few would continue to demand
 that the national department stores be filled with imports of luxury goods even if spare
parts for essential production units cannot be procured for lack of foreign exchange.

Unfortunately, the projection of the ECA is proving correct. Africa’s GDP per capita was lower in
the 1990s than it was at the end of the 1960s. When expressed in purchasing-power parity dollars
(discussed later), Africa’s average GDP is the lowest in the world, even lower than South Asia’s (India,
Pakistan, Bangladesh, and Sri Lanka). Moreover, life expectancy in sub-Saharan Africa, reversing the
global trend, has declined to the level of 1975, 46 years (inside front cover table), primarily because of
the high adult prevalence of HIV/AIDS.

Africa’s political milieu, authoritarian and predatory rule and widespread civil wars, militate
against economic growth. Evidence from Africa reinforces cross-national findings, a refutation of
Singapore’s former prime minister Lee Kuan Yew’s thesis, that democratization is directly related to the
level and rate of economic growth. In 2018, only 5 (Botswana, Gambia, Mauritius, Senegal, Zimbabwe)
of 47 sub-Saharan countries were multiparty democracies (Bratton and van de Walle 2017; Ndulu and
O’Connell 1999:51). By 2016, the number of democracies had not increased much. Indeed, a majority of
the democratically elected regimes in Africa contrive to hold elections to satisfy international norms of
“presentability,” and ignore political liberties, the rule of law, and separation of power.

Claude Ake writes: “With independence African leaders were in no position to pursue
development; they were too engrossed in the struggle for survival. ... [Indeed] instead of being a public
force, the state in Africa tends to be privatized, that is, appropriated to the service of private interests by
the dominant faction of the elite.” Political elites extract immediate rents and transfers rather than
providing incentives for economic growth. Clientelism or patrimonialism, the dominant pattern in Africa,
is a personalized relationship between patrons and clients, commanding unequal wealth, status, or
influence, based on conditional loyalties and involving mutual benefits. In Nigeria’s second republic,
Richard Joseph labeled this phenomenon prebendalism, referring to “patterns of political behaviour
which rest on the justifying principle that such offices should be competed for and then utilized for the
personal benefit of officeholders as well as their reference or support group.” Prebendalism connotes an
intense struggle among communities for control of the state. Corruption is endemic to political life at all
levels in Nigeria and many LDCs. Political leaders use funds at the disposal of the state for systematic
corruption, from petty survival venality at the lower echelons of government to kleptocracy at the top.

Two-way causation links the increase in civil wars in Africa to its dismal growth record (negative
per-capita growth, 1974–90, and barely positive in the 1990s). Indeed, Stewart, Huang, and Wang
indicate that Africa had by far the greatest number of deaths (direct and indirect) from wars, 1960 to
1995, as a proportion of the 1995 population: 1.5 percent, compared to 0.5 percent in the Middle East,
0.3 percent in Asia, and 0.1 percent in Latin America.

in Latin America. Nigeria is a clear example of ECA’s foreboding. By the late 1970s, Nigeria,
fueled by oil wealth, had surpassed South Africa as Africa’s nominal GDP leader, and was classified as a
middle-income country in 1978–80. The contrast between the 1960s to 1970s and the first decade of
the 21st century is remarkable. To be sure, visitors in the central cities notice that the urban elite
(perhaps 10 percent of the population) is prosperous, with automobiles, cell phones, and refrigerators.
But these pockets of prosperity hide Nigeria’s massive income disparities. The World Bankranks Nigeria
as having the 15th highest Gini index of income inequality in the world (113 countries ranked), with the
highest 10 percent of income earners enjoying 40.5 percent of income, whereas the lowest 10 percent
claims only 1.6 percent. Also 91 percent of the population, the highest among 90 countries listed, lives
below the international poverty line of $2 a day (in 1993 prices).

From 1965 to 2004, Nigeria’s average material well-being fell. This decline included that of
average nutritional levels (the proportion of the population undernourished rose substantially), average
consumer spending, access to health care, and infrastructure (transport and communications degraded
from inadequate maintenance). The shares of Nigeria’s shrinking middle class have plummeted. Many
middle-level professionals, teachers, and civil servants were marginalized in 2004; in 1965, they had
perquisites of automobile loans and housing.

Alienation in 2004 may even be more widespread than in 1965, just before the civil war. The
impoverished people of the oil delta area have protested the high unemployment and lack of public
goods and social services amid the wealth of foreign companies and their domestic collaborators. Ethnic
and sectarian strife is rampant. The federal government consistently lacks accountability for hundreds of
millions of dollars collected from petroleum exports and revenues. To get a picture of present-day
Africa, you can multiply Nigeria’s ills several times (Nigeria, whose poverty and corruption may be
representative of much of Africa, has one-sixth to one-seventh of the population of Africa).

In Nigeria, Ethiopia, and Zambia, neither growth nor development took place in the last quarter
of the 20th century. In Kenya and Malawi, growth took place without much development. In most of
Asia and parts of Latin America, both growth and development took place.

Economic development can refer not only to the rate of change in economic wellbeing but also
to its level. Between 1870 and 1998, Japan had a rapid rate of economic development. Its real (inflation-
adjusted) growth rate in GNP per capita was about 2.6 percent yearly (Chapter 3), and there was
substantial technical innovation, improved income distribution, and a decline in the share of the labor
force in agriculture. In addition, Japan has a high level of economic development – its 2003 nominal per
capita GNI, $34,510, placed it among the four richest countries in the world (inside front cover table).
Other measures indicate most Japanese are well fed and housed, in good health, and well educated.
Only a relative few are poor. This book will use both meanings of economic development.

Classification of Countries
When the serious study of development economics began in the late 1940s and early 1950s, it
was common to think of rich and poor countries as separated by a wide gulf. The rich included Western
Europe, the United States, Canada, Australia, New Zealand, and Japan; the poor included Asia, Africa,
and Latin America.

The boundary between rich and poor countries, overly simple then, has become even more
blurred during the first decade of the 21st century. Today, an increasing number of the high-and upper-
middle-income countries are non-Western, and the fastest-growing countries are not necessarily the
ones with the highest per capita GNP. Those countries considered to be poor in 1950 grew at about the
same rate as rich countries during the subsequent three decades. A few of the poor countries in 1950 –
such as Taiwan, Singapore, South Korea, Malaysia, Thailand, and Mexico – grew so much more rapidly
than some higher-income countries in 1950 (Argentina, Uruguay, Venezuela, and New Zealand, for
example) that the GNI per capita of the countries of the world now forms a continuum rather than a
dichotomy.

Several GNP per capita rankings shifted substantially between 1950 and 2003. Among present-
day Asian, African, and Latin American LDCs listed in both GNP per capita rankings for 1950 in a World
Bank study and for 2003 from sources in the inside front cover table, Venezuela fell from first to
thirteenth, Uruguay from second to sixth, Peru from 11th to 22nd, and Bolivia from 31st to 56th, being
overpassed by war-affected Japan, Taiwan (which rose from thirty-fifth to first), and South Korea, which
vaulted from forty-fifth to second. In Africa, Morocco, engaged in conflict with Algeria over the Spanish
Sahara and with local labor unions over social policy, declined from 17th to 32nd; Zambia, with rapidly
falling relative world copper export prices after the mid-1970s, fell from 22nd to 77th; and Ghana, with
chronic cedi overvaluation and low farm prices that discouraged export expansion until the 1980s,
dropped from a two-way tie for 15th and 16th to 59th. During this period, Taiwan and South Korea, then
43rd and 46th, respectively, but since graduating to the high-income category, leapfrogged Ghana, as
did Malaysia, Turkey, Colombia, and Indonesia, as well as Thailand, which rose from 49th to 14th.

The classification of development used by the World Bank (2003h and inside back cover) divides
countries into four groups on the basis of per capita GNI. In 2003, these categories were roughly low-
income countries ($1,000 or less), lower-middle-income countries ($1,001–3,000), upper-middle-income
countries ($3,000–9,000), and high-income countries ($9,000 or more). Each year, the boundary
between categories rises with inflation, but few countries shifted categories between 1974 and 2003.

Sometimes the high-income countries are designated as developed countries (DCs) or the North,
and middle- and low-income countries as developing, underdeveloped, or less-developed countries
(LDCs), or the South. Underdeveloped was the term commonly used in the 1950s and 1960s, but it has
since lost favor. Perhaps all countries are underdeveloped relative to their maximum potential.
However, the term underdeveloped, like less developed, has declined in use recently, not because it is
inaccurate, but because officials in international agencies consider it offensive. And the term developing
countries appears to be a euphemism when applied to parts of sub-Saharan Africa that grew (and
developed) very little, if at all, from the 1970s through the first decade of the 21st century.
Nevertheless, this book uses the latter term, as it is widely understood within the world community to
refer to countries with low and middle GNP or GNI per capita.

The 134 Asian, African, and Latin American members of the UN Conference on Trade and
Development (UNCTAD) often are referred to as the third world, a term originating in the early post–
World War II decade. By refusing to ally themselves with either the United States or the Soviet Union,
nonaligned nations forged a third political unit in the United Nations. Today, the term has lost its original
meaning, no longer connoting nonalignment but distinguishing the low-and middle-income economies
of the developing world from the first world, the high-income capitalist countries, where capital and
land are owned by private entities; and the second world socialist, or centrally directed countries, where
the government owns the means of production.

Contrary to Western usage, the second world described its economic system as socialism rather
than communism. In Marxian terminology, communism refers to a later stage of development when
distribution is according to needs, money is absent, and the state withers away. With the collapse of the
Soviet Union in 1991, and the transition of the formerly socialist economies of Russia, East-Central
Europe, and Central Asia toward a capitalist or mixed economy, only Cuba and North Korea are still
socialist. Even Sweden, a social democracy, with an emphasis on taxes and transfers to redistribute
income, and France, with indicative planning, which states government expectations, aspirations, and
intentions but not authorization, are classified in the first world.

The term second world is rarely used now, especially since 1989–91, when Eastern Europe, the
former Soviet Union, Mongolia, China, and Vietnam have been moving, albeit haltingly, toward the end
of transition, with the Communist Party’s loss of monopoly political power, the private sector accounting
for the majority of GDP, and the market becoming the “dominant coordinator of economic activities”.
By the mid-to late 1990s, virtually all formerly socialist economies in Europe had passed their inflection
point, the lowest point, for real GDP since 1989.

This generally rising trend following an early abrupt five-year or so decline still meant that real
GDP per capita, 1989 to 2001, had fallen about one-third in Russia, more than one-half in Ukraine, and
10 to 40 percent in the rest of the former Soviet Union. By 2001, only four formerly socialist European
nations had attained their 1989 real GDP by 2001: Poland, which reached its 1989 level in the mid-
1990s, and Slovenia, Hungary, and Slovakia, achieving 1989 levels in the late 1990s. Unemployment rose
to 16 percent of the labor force in Poland, 10 percent in Russia, and 7–19 percent in the rest of East-
Central Europe in 2000. Some states of the former Soviet Union are not likely to attain their 1989 real
GDP until near the end of the first (or even the second) decade of the 21st century. With the widespread
overestimation of the pre-1989 output of the former European and Soviet socialist countries, and the
collapse of their output just after 1989, these countries are now included among developing (mostly
middle-income) countries.

Branko Milanovic and Shlomo Yitzhaki, in decomposing a global income distribution, ask, “Does
the World Have a Middle Class?” between the first and third worlds, and answer “No.” Their division
gives new meaning to the concept of a tripartite world. The first world, richer or equal to real GDP per
capita in Italy (PPP$8,000 or more in 1999), represents 16 percent of the world’s population, and the
third world, with income equal or less than Brazil’s (PPP$3,470, about equal to the official poverty line in
Western Europe), comprises 78 percent of the world. Only 8 percent is left for the world’s middle class!
This three-part grouping, leaving very little overlap, captures more than 90 percent of global inequality.7
Chapter 6 discusses the components of global income inequality further.

The South Commission, chaired by the late Julius K. Nyerere, an articulate spokesperson for the
poor who was head of government in Tanzania from 1961 to 1985, declares that “The primary bond that
links the countries and peoples of the South is their desire to escape from poverty and
underdevelopment and secure a better life for their citizens” (South Commission 1990:1). Yet economic
interests still vary substantially between and within the following types of developing countries: (1) the
26 economies in transition (East-Central Europe and the former Soviet Union, all low- and middle-
income countries except high-income Slovenia), recognized as separate by the South Commission; (2)
the eight members of the Organization of Petroleum Exporting Countries, or OPEC (not including high-
income Kuwait and the United Arab Emirates); (3) the 48 poorest countries, designated as least
developed countries, seven listed and starred in the cover table; and (4) 106 other developing
countries.

The label “economies of transition” (implying a passage to the market) may be a euphemism of
the DCs. Those citizens experiencing falling standards of living in the 1990s and first decade of the 21st
century fear destitution before they arrive at the promised land of long-run equilibrium. Indeed, by
1995, in Russia, Ukraine, Lithuania, Poland, Hungary, Romania, Bulgaria, and Slovakia, the former ruling
Communist Party (reincarnated as a socialist or social democratic party and opposed to central planning)
had won a parliamentary plurality back from transient ruling parties or cliques committed to rapid
economic reform and liberalization.

Among OPEC members, high- and upper-middle-income economies are Kuwait, Libya, Saudi
Arabia, Venezuela, the United Arab Emirates, and Gabon. Iran dropped from upper-middle-income
status after the oil output disruptions during the 1979 Iranian revolution and the 1980–88 Iran-Iraq war,
and Iraq also fell from the same status after the war with Iran, the U.N.-imposed trade ban in the 1990s,
and the U.S.-led invasion of 2003. Indonesia, fluctuating between low-income and lower-middle-income
status, and low-income Nigeria, each with populations of more than 90 million, lack substantial
surpluses, spending most foreign exchange on basic import requirements, such as machinery,
equipment, food, and raw materials.

In 1971, the United Nations designated 25 countries with a low per capita income, low share of
manufacturing in gross product, and low adult literacy rates as least developed. A number of countries
asked to be so designated, hoping to obtain economic assistance, especially from the United Nations.
Since then, the United Nations has added other criteria to this list of marginalized economies, including
low levels of human development (on indicators such as life expectancy, per capita calorie supplies, and
primary and secondary school enrollment rates), natural handicaps (such as a small population, severe
climatic risks, land-lockedness, and geographical isolation), and low economic diversification. The list of
countries has grown to 48 (including Afghanistan, Angola, Bangladesh, Burkina Faso, Burundi, Cambodia,
Congo Kinshasa, Ethiopia, Haiti, Liberia, Malawi, Mali, Mozambique, Myanmar or Burma, Nepal, Niger,
Rwanda, Somalia, Sudan, Tanzania, Uganda, Yemen, and Zambia), overlapping greatly with low-income
countries. Most least developed countries, however, are small. Most U.N. supporters of this program
feared that DCs would treat the proposal seriously only if the number of countries were clearly limited.
Thus, populous countries, such as India, Pakistan, Vietnam, and Nigeria (and even Kenya) were not
included.

The four Asian tigers, South Korea, Taiwan (China-Taipei), Singapore, and Hong Kong (the largest
investor in and a major recipient of investment from China, and a part of China since 1997) are included
among the newly industrializing countries (NICs). The four, which have been growing rapidly despite
stumbling temporarily in the 1997–98 Asian financial crisis, are industrially diversified and high-income
countries. Nine less advanced economies, Mexico, Brazil, Malaysia, Turkey, Argentina, India, China,
Portugal, and South Africa, among others, are sometimes included among NICs.

China, a lower-middle country on a GNI per capita basis, has a GNI PPP of $5,625 billion, second
to the $10,110 billion of the United States in 2002, and ahead of Japan’s $3,315 billion. GNI is an
indicator of potential military and diplomatic strength. If China’s total growth continues to exceed that
of the United States, China may surpass the United States by the second to third decade of the 21st
century.

LDC debtors, such as Argentina, Brazil, Bangladesh, Kenya, and Cote d’Ivoire, ˆ have been
interested in the expansion of official loan facilities, especially to finance oil imports. Their attempts to
improve financing were directed at OPEC countries. Nevertheless, OPEC countries have maintained an
alliance with oil-importing, developing countries on a broad range of economic and political issues in
international forums. Many OPEC countries and oil-importing LDCs shared a concern with debt relief and
rescheduling, economic adjustment, and macroeconomic stabilization. Additionally, most OPEC
countries, despite their high per-capita GNP, face problems common to most of the developing world –
high illiteracy, high infant mortality, and dependence on imported technology. The NICs (both four and
nine), which rely heavily on manufactured exports, have been more interested in reduced DC trade
barriers against manufacturers than in the reduced DC agricultural subsidies and primary commodity
stabilization sought by Uganda, Malawi, Sri Lanka, and Honduras.

Still in 1974 to 1975, NICs (none then among high-income countries) and OPEC countries joined
with other developing economies in the successful adoption by the U.N. General Assembly of a
declaration on principles and programs to reduce the adverse impact of the international economic
order on LDC development. This order includes all economic relations and institutions, both formal and
informal that link people living in different nations. These economic institutions include international
agencies that lend capital, provide short-term credit, and administer international trade rules. Economic
relations include bilateral and multilateral trade, aid, banking services, currency rates, capital
movements, and technological transfers. Amid the tepid response by DCs, LDCs have changed their
strategies, eschewing comprehensive strategies on the world order but continually pressing for
concessions on various fronts, including lobbying for reduced DC tariffs and subsidies in the World Trade
Organization (WTO), which administers international trade rules; seeking debt reductions for highly-
indebted poor countries; and tying U.N. millennium development goals to aid to decrease poverty and
illiteracy.

Problems with Using GNP to Make Comparisons over Time

Economists use national-income data to compare a given country’s GNP or GNI over time. The
inside front cover table shows the economic growth of 63 of 123 countries, 1973 to 1998. For example,
Malaysia’s growth in GDP per capita was 4.16 percent yearly. On the basis of a simple calculation, you
might state, “This means that Malaysia’s GNP capita in 1998 was 277 percent (1.041625) of what it was
in 1973.” Yet a statement such as this, based on official growth figures, is subject to serious question as
to accuracy.

Students know that the GNP price deflator affects government and World Bank figures for GNP
and its growth. Whether the price deflator is 112.5, 125, 150, or another figure depends on which
weighted price index is used. A number of countries, especially in Africa and Eastern Europe, have not
changed the quantity weighting of commodity prices since before 1972, despite substantial output
structural change. Economic development changes prices with shifts in supply and demand. A newly
modernizing country may find that a good, such as steel, which is of little importance in the output mix
in the premodern era, looms large during the process of modernization. Whether the country uses early
or late (sometimes premodern or modern) weights in devising a price index makes a substantial
difference in determining how large the price deflator will be in adjusting GNP growth.

Let us use Malaysia to illustrate the price-index problem. In showing how Malaysia calculates its
GNP price deflator, assume that Malaysia produces only two goods, electronic calculators and rubber
boots. Suppose Malaysia produces 20 million electronic calculators at R400 apiece (with R the Malaysian
currency ringgit) and 200 million pairs of rubber boots at R100 per ton in 1973, and 100 million
calculators at R100 apiece and 400 million pairs of rubber boots at R200 per ton in 1998. The output of
boots grew steadily as prices doubled, whereas the output of calculators increased fivefold and prices
were cut substantially, as the industry benefited from large-scale economies and a rapidly-improving
technology.

Malaysia may use the Laspeyres price index, applying base-period or 1973 (not late-year or
1998) quantities to weight prices. The aggregate price index

In Malaysia, the GNP price deflator using the Laspeyres index, 1.5, exceeds that using the
Paasche index, 1.125. To the extent that industries with more rapid growth, such as the electronic
calculator industry, show relatively less rapid increases (or here even reductions) in price, a Laspeyres
index, which uses base-period weights, will show higher values than Paasche-type indexes, which use
weights from a current period. The Laspeyres index is biased upward and the Paasche index biased
downward. Although the Fisher ideal index, a geometric average of the Laspeyres and Paasche indices,
removes bias, it is not used much because of its complexity.

National-income statisticians may not find adequate price weights for wonder drugs and other
new goods recently discovered. In “Viagra and the Wealth of Nations,” Paul Krugman asks (1998:24),
How do we compare today’s price for a good not available at any price in 1973 – the Internet, fax
machine, microwave oven, video-cassette player, automatic teller machine, music file transfer, or a drug
to cure cancer, male impotence (Viagra), baldness, and Altzheimer’s? What was the cost of a substitute
for Viagra or electronic mail in 1973? Any imputation falls short of capturing the real improvements in
today’s living standards from a wider choice of goods and services.
Problems in Comparing Developed and Developing Countries’ GNP
International agencies generally do not collect primary data themselves. These agencies almost
always base their statistical publications on data gathered by national statistical agencies that often use
different concepts and methods of data collection. The United Nations has not yet successfully
standardized these concepts and methodologies. But aside from these problems, there are other
incomparabilities, especially between the GNPs of rich and poor countries.

According to the cover table, per capita GNI or GNP varies greatly between countries. For
example, compare the GNP per capita of India and the United States. The 2003 U.S. GNP per capita of
$37,610 is more than 70 times that of India’s $530. Could an Indian actually survive for one year on less
than the weekly income of an average American? In reality, income differences between developed and
developing countries are very much overstated.

One difference is that developed countries are located in predominantly temperate zones, and
LDCs are primarily in the tropics. In temperate areas such as the northern United States, heating,
insulation, and warmer clothing merely offset the disadvantages of cold weather and add to GNP
without increasing satisfaction.

Apart from this discrepancy, the major sources of error and imprecision in comparing GNP
figures for developed and developing countries are as follows:

1. GNP is understated for developing countries, because a greater proportion of their goods and
services are produced within the home by family members for their own use rather than for sale in the
marketplace. Much of the productive activity of the peasant is considered an integral part of family and
village life, not an economic transaction. The economic contribution of the housewife who grinds the
flour, bakes the bread, and cares for the clothes may not be measured in GNP in poor countries, but the
same services when purchased are included in a rich country’s GNP. In addition, subsistence farmer
investments in soil improvements and the cultivation of virgin land are invariably understated in
national income accounts. Although a shift from subsistence to commercial production may be slow
enough to be dismissed in a country’s GNP for three to five years, it is an important distortion for longer
run or intercountry comparisons. Heston estimates that, in 1975 in LDCs, the mean share of the
subsistence sector in GDP was 15 percent but does not estimate GDP’s corresponding margin of error
for GDP.

In some ways, distortions in income differences between the poor country and rich country are
analogous to those between the United States in the 19th and 20th centuries. Although estimates
indicate U.S. real per capita income for 1870 was one-eleventh what it was in 1998, adjustments would
indicate a figure closer to one-fifth. Great-great-great-grandfather grew his fruits and vegetables, raised
dairy cattle for milk and sheep for wool, and gathered and chopped firewood. Great-great-great-
grandmother processed the food, prepared the meals, and sewed quilts and clothes for the family. But
few of these activities added to national product. Today, their great-great-great-grandchild purchases
milk, fruits, and vegetables at the supermarket, buys meals at restaurants, and pays heating bills – all
items that contribute to national product. Moreover, our greatgreat-great-grandparents’ grain output,
when estimated, was valued at farm-gate price, excluding the family’s food processing. Statistics show
U.S. cereal product consumption increased by 24 percent from 1889 to 1919, although it decreased 33.5
percent if you impute the value of economic processes at home, such as milling, grinding, and baking.
Analogously, most food consumed by the poor in low income economies is valued at the farm price,
because most grow their own food or buy food at farm prices. Thus, part of today’s increased GNP per
capita (over that of our great-greatgreat-grandparents) occurs because a larger percentage of
consumption enters the market and is measured in national income.

2. GNP may be understated for developing countries, where household size is substantially
larger than that in developed countries, resulting in household scale economies. Although it is not
accurate to say that “two can live as cheaply as one,” it is true that two can live more cheaply together
than separately. India’s average household size is 5.2 compared to the U.S.’s 2.6; moreover, a larger
percentage of the average Indian household consists of children, who consume much less food than
adults. If we adjust India’s income to an equivalent-adult, equivalent-household (EAEH) income based on
household size and children percentage, India’s per capita income is roughly 10 percent higher, who
provides EAEH adjustment. The EAEH adjustment in Africa is more than 10 percent, as its population
growth rate and average household size are larger than India’s.

3. GNP may be overstated for developed countries, because a number of items included in their
national incomes are intermediate goods, reflecting the costs of producing or guarding income. The
Western executive’s business suits and commuting costs should probably be considered means of
increasing production rather than final consumer goods and services, just as expenditures on smog
eradication and water purification that add to national income are really costs of urbanization and
economic growth. Furthermore, part of defense spending is a cost of guarding higher incomes, and not
for national power and prestige.

4. The exchange rate used to convert GNP in local currency units into U.S. dollars, if market
clearing, is based on the relative prices of internationally traded goods (and not on purchasing power –
see later). However, GNP is understated for developing countries because many of their cheap, labor-
intensive, unstandardized goods and services have no impact on the exchange rate, as they are not
traded. Many of the necessities of life are very low priced in dollar terms. In 2003, for example, rice –
the staple in the diet of an Indian villager – cost 10 rupees (about 20 U.S. cents) per capita per day. Also,
services in India tend to be inexpensive. Thus, 2003 annual salaries for elementary teachers were about
one-tenth as high as those in the United States – a case that surely overstates differences in the quality
of instruction. (See Chapter 17, which indicates that recently trade in services has increased with
enhanced globalization, which will reduce somewhat the scope for this distortion in the future.)

5. GNP is overstated for countries (usually developing countries) where the price of foreign
exchange is less than a market-clearing price. This overstatement can result from import barriers,
restrictions on access to foreign currency, export subsidies, or state trading. Suppose that in 2003 India’s
central bank had allowed the exchange rate to reach its free market rate, Rs. 85 = $1, rather than the
official rate of Rs. 44.20 = $1. Then the GNP per capita figure of Rs. 23,430 would have been $276
(23,430 divided by 85) rather than $530 (23,430 divided by 44.20). On balance, other adjustments
outweigh this effect, so that income differences between rich and poor countries tend to be overstated.
Comparison-Resistant Services
Comparison-resistant services, like health care, education, and government administration,
which comprise more than 10 percent of most countries’ expenditure, distort cross-national, but not
necessarily DC-LDC, GNP comparisons. People do not buy a clearly defined quantity of university
education, crime prevention, health maintenance, and forest management as they do food and clothing.
The usual ways of measuring service output are unsatisfactory: by labor input cost or to use productivity
differences for a standardized service (for example, a tonsillectomy) as representative of general
differences (for example, in medicine). However, because health care and basic education are labor
intensive, a poor economy needs less money than a rich economy to provide the same services.

Purchasing-Power Parity (PPP)

Earlier we pointed out that exchange rates omit nontraded goods, and that the relative prices of
nontraded goods to traded goods are lower in developing than in developed countries. The International
Comparison Project (ICP) of the U.N. Statistical Office and the University of Pennsylvania converts a
country’s GNP in its own currency into purchasing-power parity (or international) dollars (PPP$) by
measuring the country’s purchasing power relative to all other countries rather than using the exchange
rate. Penn researchers Robert Summers and Alan Heston compute the price level of GNP (P) as the ratio
of the purchasing power parity (PPP) exchange rate to the actual (or market) exchange rate, where
both exchange rates are measured as the domestic-currency price of the U.S. dollar. (GDP or gross
domestic product, sometimes used, is income earned within a country’s boundaries instead of gross
national product, income accruing to a country’s residents.)

The PPP exchange rate is that at which the goods and services comprising gross domestic
product cost the same in both countries. If people around the world consumed a single commodity, such
as rice, constructing PPP exchange rates would be simple. Analogously, the London Economist assumes
only one good, the Big Mac, calculating the Big Mac PPP, the exchange rate at which this McDonald’s
hamburger costs the same in all countries.

In 2003, a Big Mac price of Real 4.55 in Brazil and $2.71 in the United States meant a PPP of Real
1.68 = $1 compared to the actual exchange rate of Real 3.07 = $1, so that P was 55 percent and the Real
(Brazil’s currency) was undervalued by almost 45 percent, indicating hamburgers were cheap in Brazil.
Similarly, the South Korean Big Mac price of Wan 3537 indicates a PPP of Wan 1296 = $1 compared to
an exchange rate of Wan 1258 = $1, with P of 1.03 percent. In 2003, the U.S. dollar was strong, with only
a few currencies, such as the Swiss franc, overvalued; the Big Mac price of Sfr5.86 corresponds to a PPP
of Sfr2.21, compared to the actual rate of Sfr1.30, with P 170 so that the Swiss franc was overvalued by
70 percent. In the real world, although the purchasing power of rupees, the Indian currency, Rs. 9.40 =
$1, the exchange rate is Rs. 50.71 = $1, so that India’s P is 18.8 percent of that of the United States. The
nominal GNP per capita for 2001, $460, divided by P, 18.8 percent, equals PPP$2,450 or real GNP per
capita.

The Penn economists use a series of simultaneous equations to solve the PPP for 81 (60 in the
mid-1980s and 34 in the 1970s) benchmark and quasi-benchmark countries and world average prices for
400 to 700 commodities and services, specified in detail for quantity and quality. The averaging, which
uses a specialized multiple regression, is designed to consider the fact that not every country prices
every item. If a country fails to price an item (for example, the rental of an apartment in a 20-year-old
multistoried building, of 120 square meters, with central heating, and one bathroom), researchers
calculate the cost of making appropriate quality adjustments to a substitute item that is directly
observable. Indeed, the Penn researchers describe their basic procedure as the potato-is-a-potato rule.
“A potato with given physical characteristics was treated not only as the same produce but also as the
same quantity, whether it was purchased in the country or in the city, in January or in June, by the piece
or by the bushel, and whether it was purchased at a retail market or consumed out of own production”.
For 57 non-benchmark countries, the economists use a shortcut estimating equation in which PPP is a
function of nominal GNP per capita, steel production per capita, telephone use, motor vehicles, and
other variables.

The World Bank–Penn estimates indicate a P of 29.0 percent for sub-Saharan Africa, 19.6
percent for South Asia, 22.3 percent for East Asia and the Pacific, 38.2 percent for the Middle East and
North Africa, 50.3 percent for Latin America and the Caribbean, 28.0 percent for East and Central Europe
and Central Asia, and 96.5 percent for the high-income economies. The figure for sub-Saharan Africa
means that its purchasing-power adjusted (I$) GNP per capita, $1,620, is 3.447 (1/.290) times its GNP
converted into U.S. dollars at the existing exchange rate, $470.

How much must an average-income earner in India have to earn in U.S. dollars to attain the
same living standard (that is, same basket of goods) in the United States that the earner does in India?
How does this dollar amount compare with the average income earned in the United States?

P (or the price level of GNP), 18.4 percent for India, indicates that U.S. per-capita GNP is not 70
times but 13 (70 × .184) times that of India. (The percentage of GNP to GDP is from the CD from
Summers and Heston 1991:327–68.) The U.S. per-capita expenditure on food is almost 11 times what it
is in India, but this is only six times with adjustments in purchasing power. For staples such as bread,
rice, and cereals, U.S. per-capita consumption is twice that of India but only 1.5 times as much with the
adjustment . Or, as Princeton’s Angus Deaton indicates, Rs. 442 would convert to $10 at the official
exchange rate but to $44 at the “food” exchange rate.

Yet these comparisons do not provide answers to these two questions. You need to determine
the dollar price of India’s basket of goods and services (wheat cakes, mangos, papayas, rice, sitars, brass
tables, and so forth) in the United States and then compare this figure to the dollar price of U.S. average
income. Although we cannot indicate the ratio of the dollar price of GNP per capita in the United States
to that in India, the ratio is clearly less than 28. If Indians need to replicate their goods, and cannot
substitute wheat bread for wheat cakes, oranges for mangos, potatoes for rice, violins for sitars, or
wooden for brass tables, the ratio might be very low; indeed, it might cost the U.S. per-capita income to
replicate these goods in the United States. How detailed the goods are specified determines how high
the ratio is and how well-off India appears.

Put the shoe on the other foot. How much must an average income earner in the United States
earn in rupees to secure the same living standard in India that the person acquires in the United States?
The rupee price of an average U.S. basket of goods (including milkshakes, hamburgers, computers,
automobiles, rock-and-roll compact disks, and so forth) would be substantially more than 28 times the
average Indian basket. The U.S. consumption basket would be more costly relative to the Indian basket
the more Americans refuse, for example, to consume yogurt and vegetables instead of milkshakes and
hamburgers.
 Dan Usher suggests that you can compare income per capita more directly if you calculate the
geometric average of (1) the ratio of the U.S. to Indian output of per capita goods and services in relative
prices in dollars, and (2) the ratio of the U.S. to Indian output of per capita goods and services in relative
prices in rupees. We might expect this geometric average to correspond roughly to ICP results. Both
analyses, however, assume no substitution in consumption resulting from changes in prices.

A majority of the 138 countries with PPP adjustments are either nonbenchmark countries (and
thus based on an estimating equation) or quasi-benchmark countries, with substantial missing variables
for commodities or services. The problems are even more serious when you require a reliable time
series. The quality of data for former socialist countries is especially suspect. T. N. Srinivasan contends
that Summers and Heston “use problematic procedures of extrapolation from data for a few years and
countries to many more.” Both nominal GNP and its PPP are subject to a margin of error.

PPP, based on calculating detailed prices for a large number of commodities, represents the
product of substantial time and effort. Nevertheless, GNP PPP is relatively easy to interpret, and in
recent years, readily available, as Ps and PPPs are assumed relatively stable from year to year.

By and large, the greater the difference in per capita income between two countries, the greater
the correction for purchasing power. Chapter 6 indicates that worldwide income inequality is reduced
considerably when the gross product in developing countries is adjusted for purchasing power.

Measurement Errors for GNP or GDP Adjusted for Purchasing Power

What are the confidence intervals for gross product PPPs? (Whether we use GDP or GDP is not
an issue, as the cross-national correlation of GDP and GNP is close to perfection [with r = 1.0] for the
world, according to Firebaugh. The Penn researchers assign letter grades from “A” to “D” for the quality
of GDP estimates for each country, 1960 to 1989. The margin of error is: A = ±9 percent (18 nations),
B+=±12 percent (7 nations), B = ±15 percent, C+=±18 percent (1 nation), C = ±21 percent (34 nations),
C−=±24 percent, D+=±27 percent (11 nations), and D = ±30 percent (38 nations). For China, a special
case, comprising one-fifth of the world’s population, the error is ±50 percent. Although there is no
reliability grade for World Bank data after 1989, we can assume confidence intervals similar to earlier
data.

This margin of error may shock many readers. Kravis and Lipsey contend that the margin of error
for the worst GDP PPP estimates “is still a small range of error compared to that stemming from the use
of exchange rates to convert own-currency to common currency measures of output.” Because nations
are relatively consistent in procedures used over time, then the direction of bias is likely to be consistent
over time, meaning that the margin of error for growth rates is much smaller.

Derek Blades estimates that, given the errors of population growth and price weights used to
aggregate output indicators, the confidence interval for the economic growth of LDCs may be as much
as 2 to 3 percent. For Africa, Blades suggests an estimated growth of 0 percent in GNP per capita yearly,
1973 to 1998 (inside front cover table), together with a confidence interval of 3 percent, means an
estimated growth rate that is likely to be between −3 percent and 3 percent.
 Additionally, there may be problems in estimates of sectoral aggregate output that distort GNP
figures. In many LDCs, production estimates for domestic food crops, often the largest sector in the
economy, are based on informal estimates agricultural officers make about whether output increased or
decreased. Here even small errors may be of major importance. Assume GNP in 2003 is $10,000 million.
If GNP in 2004 is $10,300 million, with a 5-percent margin, much from agriculture, the range is between
$9785 million (a 2.15-percent decrease in GNP) and $10,815 million (an 8.15-percent increase).

A Better Measure of Economic Development?

But even with the more precise U.N.–Penn figures, using income as a measure of
development is a weak tool, and efforts have been made to replace GNP per capita with a more
reliable measure – usually an index of several economic and social variables.

THE PHYSICAL QUALITY OF LIFE INDEX (PQLI)

One alternative measure of welfare is the PQLI, which combines three
indicators – infant mortality rate, life expectancy (at age one, to not overlap
with infant mortality), and adult literacy rate, the ability to read and write in any
language (in percentage). The first two variables represent the effects of
nutrition, public health, income, and the general environment. Life expectancy
is positively correlated with GNP per capita through the impact of GNP on
incomes of the poor and public spending, especially on health care; indeed, GNP
adds no extra explanation to those of poverty and public health expenditure
(Sen 1999:44; Anand and Ravallion 1993). Infant mortality reflects the
availability of clean water, the condition of the home environment, and the
mother’s health. Literacy is a measure of well-being as well as a requirement for
a country’s economic development.

Critics of this measure stress a close correlation between the three PQLI indicators and
the composite index and GNP per capita. Nevertheless, figures on PQLI (between the most
unfavorable performance in 1950, valued at 0, and the most favorable figure, 100, expected by
the year 2000) reveal exceptions to the correlation (see inside front cover table). For instance,
China’s life expectancy and infant mortality rates, matching those of the United States in 1940,
were achieved at a per-capita income of $490. By contrast, a relatively high per capita does not
necessarily reflect widespread well-being, as in the case of affluent oil countries such as Saudi
Arabia and Oman.

However, PQLI indicators are of limited use in distinguishing levels of development

beyond middle-income countries. All three PQLI variables – life expectancy, literacy, and infant
mortality – are highly related to per-capita income until nutrition, health, and education reach
certain high levels, then the value of the variables levels off. These indicators have asymptotic
limits reflecting biological and physical maxima. Thus, except for city-states Hong Kong and
Singapore and affluent oil exporters Kuwait and the United Arab Emirates, all high-income
countries have infant mortality rates below 10 per 1000, literacy rates of 98 percent or above
(except for Portugal’s and Singapore’s 92 percent, Israel’s 95 percent, and Greece’s 97
percent), and a life expectancy of 75–80 years (except for South Korea with 73 years).

There are difficulties with PQLI not encountered with standard per-capita GNP data.
Scaling and weighting a composite index, as with PQLI, present a problem, because rescaling
raw data to a 0–1 range is somewhat arbitrary and there is no clear conceptual rationale for
giving the core indicators equal weights. Moreover, 87 of 117 LDCs with PQLI figures have not
compiled reliable data on life expectancy since 1980, and 60 LDCs lack data on adult literacy
since 1980. In addition, as scholars changed their estimates of the most favorable figures for
components by 2000, the maxima and scaling for PQLI indicators have had to be changed.
Furthermore, economists question the meaning of the PQLI growth rate, called the disparity
reduction rate, not only because of the unreliable time-series data but also because most high-
income countries are pressing near the practical maximum (99 to 100 percent for adult literacy,
for example) for some indicators, giving little scope for growth.

THE HUMAN DEVELOPMENT INDEX (HDI)

The UN Development Program (UNDP) defines human development as “a process of
enlarging people’s choices. The most critical ones are to lead a long and healthy life, to be
educated and enjoy a decent standard of living” (U.N. Development Program 1990:10). In the
face of widespread assessment that the 1980s was a “lost decade” for developing countries,
UNDP has argued that human development disparities between DCs and LDCs are much less
than disparities in income per capita, and that human development narrowed considerably
between DCs and LDCs while income gaps were widening (U.N. Development Program
1991:16–18). In its effort to measure human development, UNDP has constructed another
alternative measure of welfare, the Human Development Index.

The HDI summarizes a great deal of social performance in a single composite index
combining three indicators – longevity (a proxy for health and nutrition), education, and living
standards. Educational attainment is a composite of two variables: a two-thirds weight based
on the adult literacy rate (in percentage) and a one-third weight on the combined primary,
secondary, and tertiary gross enrollment rate (in percentage). Longevity is measured by
average life expectancy (in years) at birth, computed by assuming that babies born in a given
year will experience the current death rate of each age cohort (the first year, second year, third
year, and so forth through the nth year) throughout their lifetime. The indicator for living
standards is based on the logarithm of per capita GDP in PPP dollars.

Calculating the HDI. To construct a composite index, you determine the maximum and
minimum values for each of the three variables – in 2000, life expectancy, from 25 to 85 years,
education, adult literacy from 0 to 100, gross enrollment rate from 0 to 100%, and GDP per
capita (PPP USS) from $100 to $40,000. You normalize the observed value for each of the three
variables into a 0–1 scale. Then you express the performance in each dimension as a value
between 0 and 1 by the following formula:
 Some critics argue that development problems are essentially economic problems, a matter of
stimulating economic growth. Richard Reichel finds that PPP per capita income explains a large
proportion of other HDI components. The proportion of variation explained, or R2, is 0.783 for
life expectancy and 0.535 for literacy rate. He concludes that we do not need to measure
human development separately from average income. However, most development experts
and international agencies reject Reichel’s position, arguing that income measures still neglect
many important aspects of the development process, leaving much of human development
unexplained.

One example of a substantial divergence between HDI and income rankings is that of
South Africa, which ranked 107th in GNP per capita but only 129th among 173 countries in HDI.
Despite the introduction of a universal adult ballot in South Africa in 1994, the country’s social
indicators still reflect the legacy of decades of a white-ruled apartheid (racially separate and
discriminatory) economy. South Africa, with 0.695 HDI, is not explained well by its GDP per
capita (PPP$9510), comparable to high-human development economies Chile (0.833 HDI) and
Poland (HDI 0.831). Rather, South Africa’s HDI, about the same as Algeria, with roughly half the
PPP$ GDP per capita, and Syria, with less than half average real GDP, may better reflect its
welfare ranking.

In 1992, the purchasing-power adjusted GDP per capita of black, Asian, and mixed-race
South Africa was PPP$1,710, about the same as Senegal’s PPP$1,680, and in excess of the
PPP$1,116 for Africa as a whole. Yet this low income for 36.1 million nonwhite South Africans
stands in stark contrast to that of 7.3 million white South Africans, PPP$14,920 income per
capita, a figure higher than New Zealand’s PPP$13,970. Life expectancy, an indicator of health,
was 62 in South Africa compared to 72 in Chile and Poland. But life expectancy was only 52 for
black South Africans, 62 for Asians and mixed races, and 74 for whites, 54 for Africa generally,
and 77 for DCs, whereas the adult literacy rate was 67 percent for nonwhites and 85 percent
for whites. Racial differences in human capital and discrimination based on social interactions,
networks (from racially segregated housing), informal screening devices, self-reproducing
educational disadvantages, and other socially based means persisted, resulting in no
improvement in the relative status of majority black and mixed-race workers between 1992
and the late 1990s.

HDI, when disaggregated regionally, can vary widely within a country. Kerala, a south
Indian state with one of the lowest incomes per capita in the country but with a more favorable policy
on female education and property ownership, communal medical care, and old-age pensions, surpasses
the Indian average in the following categories: a life expectancy at birth of 77 years compared to 63
years, an infant mortality rate of 16 compared to 67 per 1,000, an adult literacy rate of 91 percent
compared to 57 percent, a female literacy rate of 94 percent compared to 54 percent, and an HDI of
0.68 compared to 0.59.

landless workers or campesinos, rebelled against Mexico’s ruling party, which they believed
was responsible for their poverty and distress. In the state, PPP$ GDP per capita was 43
percent below the national average and adult literacy 24 percent below the national average.
During the first decade of the 21st century, Northeast Brazil lags behind Southern Brazil 71 to
 54 years in life expectancy, 93 percent to 61 percent in adult literacy rate, and 40 percent in
real GDP per capita, disparities larger than those in Mexico.

HDI does not capture the adverse effect of gender disparities on social progress. In
1995, the U.N. Development Program measured the gender-related development index (GDI),
or HDI adjusted for gender inequality. GDI concentrates on the same variables as HDI but notes
inequality in achievement between men and women, imposing a penalty for such inequality.
The GDI is based on female shares of earned income, the life expectancy of women relative to
men (allowing for the biological edge that women enjoy in living longer than men), and a
weighted average of female literacy and schooling relative to those of males. However, GDI
does not include variables not easily measured such as women’s participation in community life
and decision making, their access to professional opportunities, consumption of resources
within the family, dignity, and personal security. Because gender inequality exists in every
country, the GDI is always lower than the HDI. The top-ranking countries in GDI are Australia,
the Nordic countries of Norway, Sweden, and Finland, North America (Canada and the United
States), Belgium, Iceland, Netherlands, and the United Kingdom. The bottom six places, in
ascending order for GDI, include Sierre Leone, Niger, Burundi, Mozambique, Burkina Faso, and
Ethiopia; Afghanistan, ranked lowest in 1995 but lacks 2000 data. In these countries, women
face a double deprivation – low human development achievement and women’s achievement
lower than men.

Many who agree that human development needs separate attention are critical of HDI.
HDI has similar problems to those of PQLI – problems of scaling and weighting a composite
index, the lack of rationale for equal weights for the core indicators, and the lack of reliable
data since 1980. Additionally, school enrollment figures are not internationally comparable, as
school quality, dropout rates, and length of school year vary substantially among and within
countries.

Before 1994, the U.N. Development Program shifted the goalposts for life expectancy,
education, and real GDP per capita each year, not allowing economists to measure growth over
time; thus, a country’s HDI could fall with no change or even an increase in all components if
maximum and minimum values rose over time. In 1994, however, the U.N. Development
Program set goalposts for HDI components that are constant over time so that economists,
when they acquire HDI indices retrospectively, can compute growth over time.

The concept of human development is much richer and more multifarious than what
we can capture in one index of indicator. Yet HDI is useful in focusing attention on qualitative
aspects of development, and may influence countries with relatively low HDI scores to examine
their policies regarding nutrition, health, and education.

Weighted Indices for GNP Growth

Another reason why the growth rates of GNP can be a misleading indicator of development is
because GNP growth is heavily weighted by the income shares of the rich. A given growth rate for the
rich has much more impact on total growth than the same growth rate for the poor. In India, a country
with moderate income inequality, the upper 50 percent of income recipients receive about 70 percent
($350 billion) and the lower 50 percent about 25 percent ($150 billion) of the GNP of $500 billion. A
growth of 10 percent ($35 billion) in income for the top-half results in 7-percent total growth, but a 10-
percent income growth for the bottom half ($15 billion) is only 3-percent aggregate growth. Yet the 10-
percent growth for the lower half does far more to reduce poverty than the same growth for the upper
half.

We can illustrate the superior weight of the rich in output growth two ways: (1) as just
explained, the same growth for the rich as the poor has much more effect on total growth; and (2) a
given dollar increase in GNP raises the income of the poor by a higher percentage than for the rich.

When GNP growth is the index of performance, it is assumed that a $35 billion additional
income has the same effect on social welfare regardless of the recipients’ income class. But in India, you
can increase GNP by $35 billion (a 7-percent overall growth on $500 billion) either through a 10-percent
growth for the top 50 percent or a 23-percent increase for the bottom 50 percent.

One alternative to this measure of GNP growth is to give equal weight to a 1-percent increase in
income for any member of society. In the previous example, the 10-percent income growth for the
lower 50 percent, although a smaller absolute increase, would be given greater weight than the same
rate for the upper 50 percent, because the former growth affects a poorer segment of the population.
Another alternative is a poverty-weighted index in which a higher weight is given a 1-percent income
growth for low-income groups than for high-income groups.

Table 2-1 shows the difference in annual growth in welfare based on three different weighting
systems: (1) GNP weights for each income quintile (top, second, third, fourth, and bottom 20 percent of
the population); (2) equal weights for each quintile; and (3) poverty weights of 0.6 for the lowest 40
percent, 0.3 for the next 40 percent, and 0.1 for the top 20 percent. In Panama, Brazil, Mexico, and
Venezuela, where income distribution worsened, performance is worse when measured by weighted
indices than by GNP growth. In Colombia, El Salvador, Sri Lanka, and Taiwan, where income distribution
improved, the weighted indices are higher than GNP growth. In Korea, the Philippines, Yugoslavia, Peru,
and India, where income distribution remained largely unchanged, weighted indices do not alter GNP
growth greatly.

Is poverty-weighted growth superior to GNP-weighted growth in assessing development

attainment? Maximizing poverty-weighted growth may generate too little saving, as in Sri Lanka of the
1960s, as the rich have a higher propensity to save than the poor.
“Basic-Needs” Attainment
 Many economists are frustrated at the limited impact economic growth has had in reducing
third-world poverty. These economists think that programs to raise productivity in developing countries
are not adequate unless they focus directly on meeting the basic needs of the poorest 40–50 percent of
the population – the basic-needs approach. This direct attack is needed, it is argued, because of the
continuing serious maldistribution of incomes; because consumers, lacking knowledge about health and
nutrition, often make inefficient or unwise choices in this area; because public services must meet many
basic needs, such as sanitation and water supplies; and because it is difficult to find investments and
policies that uniformly increase the incomes of the poor.

MEASURES
The basic-needs approach shifts attention from maximizing output to minimizing poverty.
The stress is not only on how much is being produced but also on what is being produced, in
what ways, for whom, and with what impact. Basic needs include adequate nutrition, primary
education, health, sanitation, water supply, and housing. What are possible indicators of these
basic needs? Two economic consultants with the World Bank identify the following as a
preliminary set of indicators:

■Food: Calorie supply per head, or calorie supply as a percentage of requirements; protein

■ Education: Literacy rates, primary enrollment (as a percentage of the population aged 5–14)

■ Health: Life expectancy at birth

■ Sanitation: Infant mortality (per thousand births), percentage of the population with access to
sanitation facilities

■ Water supply: Infant mortality (per thousand births), percentage of the population with
access to potable water

■ Housing: None (as existing measures, such as people per room, do not satisfactorily indicate
the quality of housing)

Each of these indicators (such as calorie supply) should be supplemented by data on

distribution by income class.

Infant mortality is a good indication of the availability of sanitation and clean water facilities,
as infants are susceptible to waterborne diseases. Furthermore, data of infant mortality are
generally more readily available than data on access to water.

GROWTH AND “BASIC NEEDS”

High basic-needs attainment is positively related to the rate of growth of per capita GNP, as
increased life expectancy and literacy, together with reduced infant mortality, are associated
with greater worker health and productivity. Furthermore, rapid output growth usually reduces
poverty. Thus, GNP per head remains an important figure. But we also must look at some
indicators of the composition and beneficiaries of GNP. Basic-needs data supplement GNP data
but do not replace them. And, as the earlier South African example indicates, we must go
 beyond national averages to get basic-needs measures by income class, ethnic group, region,
and other subgroups.

IS THE SATISFACTION OF BASIC NEEDS A HUMAN RIGHT?

The U.S. Founders, shaped by the scientific and intellectual activity of the Enlightenment,
wrote in the Declaration of Independence, “We hold these truths to be sel-evident, that all
men are created equal; that they are endowed by their Creator with certain unalienable
rights.” The U.N. Universal Declaration of Human Rights goes beyond such civil and political
rights as a fair trial, universal adult vote, and freedom from torture to include the rights of
employment, minimum wages, collective bargaining, social security, health and medical care,
free primary education, and other socioeconomic rights. In fact, for many in the third world,
the fulfillment of economic needs precedes a concern with political liberties. In Africa, there is
a saying, “Human rights begin with breakfast”; and a beggar in one of Bertolt Brecht’s operas
sings, “First we must eat, then comes morality.”

Some LDCs may have to reallocate resources from consumer goods for the welloff to basic
necessities for the whole population. However, even with substantial redistribution, resources
are too scarce to attain these social and economic rights for the masses in most low-income
countries. Consider the right of free primary education. Most low-income countries have less
than one-tenth the PPP$ GNP per capita of the United States, 1.5 times the population share
aged 5–15, and greater shortages of qualified teachers, all of which means a much greater
share of GNP has to be devoted to education to attain the same primary enrollment rates as in
the United States. Far less income would be left over for achieving other objectives, such as
adequate nutrition, housing, and sanitation. Furthermore, primary school graduates in Africa
and Asia migrate to the towns, adding to the unemployed and the disaffected. A carefully
selective and phased educational program, including adult literacy programs, often can be
more economical, and do more for basic needs, than an immediate attempt at universal
primary education.

Setting up Western labor standards and minimum wages in labor-abundant LDCs is not
always sensible. With a labor force growth of 2–3 percent per year, imitating labor standards
from rich countries in LDCs may create a relatively privileged, regularly employed labor force
and aggravate social inequality, unemployment, and poverty. Economic rights must consider
the scarcity of available resources and the necessity of choice.

Development as Freedom and Liberation

In the 1970s, some Latin American Roman Catholic radicals, French Marxists, and scholars
sympathetic to China’s Cultural Revolution rejected economic growth tied to dependence on Western-
type techniques, capital, institutions, and elite consumer goods. These scholars believed that the LDCs
should control their own economic and political destiny and free themselves from domination by
Western capitalist countries and their elitist allies in the third world. According to them, the models for
genuine development were not countries such as South Korea, Taiwan, and Brazil, but Tanzania, Cuba,
and Maoist China, which stressed economic and political autonomy, the holistic development of human
beings, the fulfillment of human creativity, and selfless serving of the masses rather than individual
incentives and the production of material goods.

Since Mao Zedong’s death in 1976, the Chinese government has repudiated much of the
Cultural Revolution’s emphasis on national self-sufficiency, noneconomic (moral) incentives, and central
price fixing and is stressing household and management responsibility, limited price reform, and
investment from and trade with capitalist countries. After 1982, Presidents Julius Nyerere and Ali Hassan
Mwiniyi of Tanzania agreed that peasant resettlement into planned rural village communities had been
spoiled by corrupt and ineffective government and party officials and the influence of rich peasants.
Although Cuba, in the decade following the victory of Fidel Castro’s revolution in 1959, provided
economic security and met most of the basic needs of the bulk of the population, average consumption
levels have been low and declining since the 1980s. Consumption standards especially fell after the
Soviet Union ceased its international aid, trade subsidies, and debt write-downs just before the Soviet
collapse of 1991.

The Liberationists were not really criticizing development but, rather, growth policies disguised
as development. Including income distribution and local economic control in the definition of
development would be a better approach than abandoning the concept of development. For in the
1980s, 1990s, and first decade of the 21st century, the leaders of China, Tanzania, and Cuba seem to
have replaced the language of liberation with that of development, specifically self-directed
development.

“Development is based on self-reliance and is self-directed; without these characteristics there

can be no genuine development. ... The South cannot count on a significant improvement in the
international economic environment for its development in the 1990s. ... The countries of the South will
have to rely increasingly on their own exertions, both individual and collective, and to reorient their
development strategies, which must benefit from the lessons of past experience”. Dragoslav Avramovic
argues, “Adjustment and development programs should be prepared, and seen to be prepared, by
national authorities of [Latin American, Asian, and] African countries rather than by foreign advisors and
international organizations. Otherwise, commitment will be lacking.” Many nations, especially in Africa,
lack experience in directing their own economic plans and technical adaptation and progress.

Self-reliance does not mean isolation from the global economy. Perhaps the most successful
developing country, early modern Japan, received no foreign aid and virtually no foreign direct
investment but was liberal in foreign trade and exchange and the world champion borrower of foreign
technology. Japan, in the late 19th and early 20th centuries, directed its development planning, the
creation of financial institutions, the officials and business people sent to learn from abroad, the
foreigners hired to transfer technology to government and business, the modification of foreign
technology (especially in improving the engineering of traditional artisans), and the capturing of
technological gains domestically from learning by doing. In a similar fashion, today’s developing
countries, when receiving funds and assistance from DCs and international agencies, should be in charge
of their planning and development so that they can benefit from learning through experience

The Nobel laureate Amartya Sen’s emphasis, on broadening choice rather than freedom from
external domination, has some overlap with the Liberationists’. Sen argues that freedom (not
development) is the ultimate goal of economic life as well as the most efficient means of realizing
general welfare. Overcoming deprivations is a central part of development. Unfreedoms include hunger,
famine, ignorance, an unsustainable economic life, unemployment, barriers to economic fulfillment by
women or minority communities, premature death, violation of political freedom and basic liberty,
threats to the environment, and little access to health, sanitation, or clean water. Freedom of exchange,
labor contract, social opportunities, and protective security are not just ends or constituent components
of development but also important means to ends such as development and freedom.

Small Is Beautiful
Mahatma Gandhi, nonviolent politician and leader of India’s nationalist movement for 25 years
before its independence in 1947, was an early advocate of small-scale development in the third world.
He emphasized that harmony with nature, reduction of material wants, village economic development,
handicraft production, decentralized decision making, and labor-intensive, indigenous technology were
not just more efficient, but more humane. For him, humane means for development were as important
as appropriate ends.

Gandhi’s vision has inspired many followers, including the late E. F. Schumacher, ironically an
economist who was head of planning for the nationalized coal industry in Britain. His goal was to
develop methods and machines cheap enough to be accessible to virtually everyone and to leave ample
room for human creativity. For him, there was no place for machines that concentrate power in a few
hands and contribute to soul-destroying, meaningless, monotonous work.

Schumacher believed that productive activity needs to be judged holistically, including its social,
aesthetic, moral, or political meanings as well as its economic ends. The primary functions of work are to
give people a chance to use their faculties, join with other people in a common task, and produce
essential goods and services.

Schumacher stressed that LDCs need techniques appropriate to their culture, abundant labor,
and scarce capital and these might frequently involve simple labor-intensive production methods that
have become economically unfeasible to DCs. These technologies are intermediate between Western
capital-intensive processes and the LDCs’ traditional instruments. Yet intermediate technology may not
be suitable when (1) an industry requires virtually unalterable factor proportions; (2) modifying existing
technologies is expensive; (3) capital-intensive technology reduces skilled labor requirements; and (4)
factor prices are distorted.

Are Economic Growth and Development Worthwhile?

Economic development and growth have their costs and benefits. Economic growth widens the
range of human choice, but this may not necessarily increase happiness. Both Gandhi and Schumacher
stress that happiness is dependent on the relationship between wants and resources. You may become
more satisfied, not only by having more wants met, but perhaps also by renouncing certain material
goods. Wealth may make you less happy if it increases wants more than resources. Furthermore,
acquisitive and achievement-oriented societies may be more likely to give rise to individual frustration
and mental anguish. Moreover, rootlessness and alienation may accompany the mobility and fluidity
frequently associated with rapidly growing economies.
BENEFITS
What distinguishes people from animals is people’s greater control over their environment
and greater freedom of choice, not that they are happier. Control over one’s environment is
arguably as important a goal as happiness, and in order to achieve it, economic growth is
greatly to be desired. Growth decreases famine, starvation, infant mortality, and death; gives
us greater leisure; can enhance art, music, and philosophy; and gives us the resources to be
humanitarian.26 Economic growth may be especially beneficial to societies in which political
aspirations exceed resources, because it may forestall what might otherwise prove to be
unbearable social tension. Without growth, the desires of one group can be met only at the
expense of others. Finally, economic growth can assist newly independent countries in
mobilizing resources to increase national power.

COSTS
Growth has its price. One cost may be the acquisitiveness, materialism, and dissatisfaction
with one’s present state associated with a society’s economic struggles. Second, the mobility,
impersonality, and emphasis on self-reliance associated with economic growth may destabilize
the extended family system, indeed the prevailing social structure. Third, economic growth,
with its dependence on rationalism and the scientific method for innovation and technical
change, is frequently a threat to religious and social authority. Fourth, economic growth usually
requires greater job specialization, which may be accompanied by greater impersonality, more
drab and monotonous tasks, more discipline, and a loss of craftsmanship. Fifth, as critics such
as Herbert Marcuse charge, in an advanced industrial society, all institutions and individuals,
including artists, tend to be shaped to the needs of economic growth.

Additionally, the larger organizational units concomitant with economic growth are more
likely to lead to bureaucratization, impersonality, communication problems, and the use of
force to keep people in line. Economic growth and the growth of large-scale organization are
associated with an increased demand for manufactured products and services and the growth
of towns, which may be accompanied by rootlessness, environmental blight, and unhealthy
living conditions. Even though the change in values and social structure may eventually lead to
a new, dynamic equilibrium considered superior to the old static equilibrium, the transition
may produce some very painful problems. Moreover, the political transformation necessary for
rapid economic growth may lead to greater centralization, coercion, social disruption, and even
authoritarianism.

Thus, even if a population is seriously committed to economic growth, its attainment is not
likely to be pursued at all costs. All societies have to consider other goals that conflict with the
maximization of economic growth. For example, because it wants its own citizens in high-level
positions, a developing country may promote local control of manufacturing that reduces
growth in the short run. The question is, What will be the tradeoff between the goal of rapid
economic growth and such noneconomic goals as achieving an orderly and stable society,
preserving traditional values and culture, and promoting political autonomy?
 RISING EXPECTATIONS
Increasingly, as literacy rates rise, the previously inarticulate and unorganized masses are
demanding that political elites make a serious commitment to a better way of life for all.
These demands in some cases have proved embarrassing and threatening to elites, as the
broad economic growth the lower classes expect requires much political and economic
transformation.

In the face of increasing expectations, few societies can choose stagnation or retardation.
Increasingly, the LDC poor are aware of the opulent lifestyle of rich countries and the elite.
They have noticed the automobiles, houses, and dinner parties of the affluent; they have seen
the way the elite escape the drudgery of backbreaking work and the uncertain existence of a
life of poverty; they have been exposed to new ideas and values; and they are restless to
attain a part of the wealth they observe.

So, most LDC populations want economic growth, despite the costs. And LDCs also want
better measures of growth and development. The central focus of this book is to discuss how
LDCs can achieve and assess their development goals.

References:
Anderson, Anthony B. “Smokestacks in the rainforest: Industrial development and deforestation in the
Amazon basin.” World Development 18 (2019)

Anderson, Anthony B., ed. Alternatives to Deforestation. New York: Columbia University Press, 2019.

Assunção, Juliano, “Land Reform and Landholdings in Brazil,” UNU-WIDER Research Paper No. 2006/137,
November 2017.

Baer, Werner. The Brazilian Economy: Growth and Development. Boulder, Colo.: Rienner, 2018.

Bank Information Center. Funding Ecological and Social Destruction: The World Bank and the IMF.
Washington, D.C.: Bank Information Center, 2020.

Bauman, Renato, and Helson C. Braga. “Export financing in the LDCs: The role of subsidies for export
performance in Brazil.” World Development 16 (2018)

Binswanger, Hans P. “Brazilian policies that encourage deforestation in the Amazon.” World
Development 19 (2019)

Brazil: Responses to the Debt Crisis. Washington, D.C.: Inter-American Development Bank, 2020.

Downing, Theodore E., Susanna B. Hecht, and Henry A. Pearson, eds. Development or Destruction? The
Conversion of Tropical Forest to Pasture in Latin America. Boulder, Colo: Westview Press, 2020.
The Economist, Special Report on Brazil (November 14, 2019): http://
www.economist.com/specialreports/displayStory .cfm?story_id=E1_TQRNJQRV

Erber, Fabio Stefano. “The development of the electronics complex and government policies in Brazil.”
World Development 13 (2015)

Fields, Gary. Poverty Inequality and Development. New York: Cambridge University Press, 2020.

Hausmann, Ricardo, Dani Rodrik, and Andrés Velasco. “Growth diagnostics.” In One Economics, Many
Recipes: Globalization, Institutions, and Economic Growth, by Dani Rodrik (Princeton, N.J.: Princeton
University Press, 2017).

Hausmann Ricardo: “In search of the chains that hold Brazil back.” October 31, 2018. http://papers.ssrn
.com/sol3/papers.cfm?abstract_id=1338262.

INCRA (Brazilian agency for land reform), http://www .incra.gov.br.

Sercovich, Francisco Colman. “Brazil.” World Development 12 (2020)

Siddiqi, Faraaz, and Harry Anthony Patrinos. Child Labor: Issues, Causes, and Interventions. World Bank,
n.d. http://www.worldbank.org.

United Nations Development Program. Human Poverty Report, 2019–2020 (annual). New York: United
Nations, 2020–2021.

World Bank. Eradicating Child Labor in Brazil. Washington, D.C.: World Bank, 2021.

World Bank. Global Monitoring Report, 2017. Washington, D.C.: World Bank, 2017.

World Bank. World Development Indicators, 2019. Washington, D.C.: World Bank, 2019. Yusuf, Shahid.
Globalization and the Challenge for Developing Countries. Washington, D.C.: World Bank, 2019.