Economic Development  low-income countries (LICs) = $1,025 or less

 lower-middle-income countries (LMCs) = $1,026 - $4,035

 uppermiddle-income countries (UMCs) = $4,036 -
Chapter 2: Comparative Economic Development $12,475
 high-income countries = $12,476 or more
2.1 Defining the Developing World
2.2 Basic Indicators of Development: Real Income, Health, LMCs and UMCs are informally grouped as the middle-income
and Education countries.
 Purchasing Power Parity
World Bank
 Indicators of Health and Education
2.3 Holistic Measures of Living Levels and Capabilities - known as an “international financial institution”
 The New Human Development Index - provides development funds to developing countries
2.4 Characteristics of the Developing World: Diversity within in the form of interest-bearing loans, grants, and
Commonality technical assistance
 Lower Levels of Living and Productivity
 Lower Levels of Human Capital Newly industrializing countries (NICs)
 Higher Levels of Inequality and Absolute - special distinction among upper-middle-income or
Poverty newly high-income economies
 Higher Population Growth Rates - countries at a relatively advanced level of economic
 Greater Social Fractionalization development with a substantial and dynamic industrial
 Larger Rural Populations but Rapid Rural-to- sector and with close links to the international trade,
Urban Migration finance, and investment system
 Lower Levels of Industrialization and - designate some that have achieved relatively
Manufactured Exports advanced manufacturing sectors
 Adverse Geography
 Underdeveloped Markets Ranked through their degree of international indebtedness:
 Lingering Colonial Impacts and Unequal classified countries as severely indebted, moderately
International Relations indebted, and less indebted
2.5 How Low-Income Countries Today Differ from Developed
Another widely used classification is that of the least
Countries in Their Earlier Stages
developed countries: low income, low human capital, and
 Physical and Human Resource Endowments
high economic vulnerability
 Relative Levels of Per Capita Income and GDP
 Climatic Differences
 Population Size, Distribution, and Growth
 The Historical Role of International Migration Human capital - productive investments in people, such as
 The Growth Stimulus of International Trade skills, values, and health resulting from expenditures on
 Basic Scientific and Technological Research and education, on-the-job training programs, and medical care
Development Capabilities
Emerging Markets
 Efficacy of Domestic Institutions
2.6 Are Living Standards of Developing and Developed - introduced at the International Finance Corporation to
Nations Converging? suggest progress (avoiding the then-standard phrase
2.7 Long-Run Causes of Comparative Development Third World that investors seemed to associate with
stagnation)
- we do not use this because:
Defining the Developing World  emerging market is widely used in the
financial press to suggest the presence of
The most common way to define the developing world is by active stock and bond markets
per capita income.  referring to nations as markets may lead to an
underemphasis on some non-market
Classifications of countries by their Economic Status priorities in development
Created by International Bank for Reconstruction and  usage varies and there is no established or
Development (IBRD) or the World Bank: generally accepted designation of which
markets should be labeled as emerging and
Ranked by their levels of gross national income (GNI) per
which as yet to emerge (the latter now
capita:
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 sometimes dubbed frontier markets in the  Undernourishment - consuming too little food to
financial press) maintain normal levels of activity = “problem of
hunger”
Basic Indicators of Development: Real Income, Health, and
 Child Mortality – under 5 years old
Education
 Birth Rate - high fertility can be both a cause and a
Basic Indicators of Three Facets of Development: consequence of underdevelopment

Educational Attainments:
1. real income per capita adjusted for purchasing power
2. health as measured by life expectancy,  Literacy - fraction of adults reported or estimated to
undernourishment, and child mortality have basic abilities to read and write
3. educational attainments as measured by literacy and
schooling
Holistic Measures of Living Levels and Capabilities
 Purchasing Power Parity
 The New Human Development Index
Gross National Income (GNI) per capita
Human Development Index (HDI)
- most common measure of the overall level of
economic activity - index measuring national socioeconomic
- often used as a summary index of the relative development, based on combining measures of
economic well-being of people in different nations education, health, and adjusted real income per capita
- Calculation: total domestic and foreign value added - Ranks each country on a scale of:
claimed by a country’s residents without making 0 = lowest human development
deductions for depreciation of the domestic capital 1= highest human development
stock.
Based on three goals or end products of development:
Value added - portion of a product’s final value that is added 1. a long and healthy life as measured by life
at each stage of production expectancy at birth
2. knowledge as measured by a combination of
Depreciation (of the capital stock) - wearing out of
average schooling attained by adults and expected
equipment, buildings, infrastructure, and other forms of
years of schooling for school-age children
capital, reflected in write-offs to the value of the capital
3. decent standard of living as measured by real per
stock.
capita gross domestic product adjusted for the
Capital stock - total amount of physical goods existing at a differing purchasing power parity of each
particular time that have been produced for use in the country’s currency to reflect cost of living and for
production of other goods and services the assumption of diminishing marginal utility of
income
Conversion of national currency figures into U.S. dollars does
not measure the relative domestic purchasing power of Diminishing Marginal Utility - the subjective value of
different currencies. additional consumption lessens as total consumption
becomes higher
Purchasing power parity (PPP)
Two steps in calculating the New HDI:
- calculation of GNI using a common set of international
prices for all goods and services, to provide more 1. Creating the three “dimension indices”
accurate comparisons of living standards 2. Aggregating the resulting indices to produce the
- defined as the number of units of a foreign country’s overall New Human Development Index (NHDI)
currency required to purchase the identical quantity of
In the New HDI, instead of adding up the health, education,
goods and services in the local developing country
and income indexes and dividing by 3, the New HDI is
market as $1 would buy in the United States 1 3 1 31 3
calculated with the geometric mean: NHDI = H / E / I /

 Indicators of Health and Education H = health index, E = education index, I = income index

Health:
 Life Expectancy - average number of years newborn
children would live if subjected to the mortality risks

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The wide range of income, health, education, and HDI A major implication of high birth rates: active labor force has
indicators already reviewed is sometimes called a “ladder of to support proportionally almost twice as many children as it
development.” does in richer countries

Both older people and children are often referred to as an

economic dependency burden in the sense that they must be
Characteristics of the Developing World: Diversity within supported financially by the country’s labor force
Commonality (Read Group Work)
Dependency burden – proportion of the total population
 Lower Levels of Living and Productivity aged 0 to 15 and 65+, which is considered economically
unproductive and therefore not counted in the labor force.
The wide disparity in income largely corresponds to the large
gaps in output per worker between developing and The higher the crude birth rate is, the higher its dependency
developed countries burden is
Low income leads to low investment in education and health  Greater Social Fractionalization
as well as plant and equipment and infrastructure, which in
turn leads to low productivity and economic stagnation = Fractionalization – significant ethnic, linguistic, and other
poverty trap or what Nobel laureate Gunnar Myrdal called social divisions within a country
“circular and cumulative causation”
The greater the ethnic, linguistic, and religious diversity of a
A misconception about this implies that countries are country, the more likely it is that there will be internal strife
doomed to remain poor. However, the concept of poverty and political instability.
traps suggests that poverty can be a dynamic condition, with
the potential to persist but also to be broken with the right Being indigenous makes it much more likely that an
interventions. individual will be less educated, in poorer health, and in a
lower socioeconomic stratum than other citizens
 Lower Levels of Human Capital
 Larger Rural Populations but Rapid Rural-to-Urban
Human capital - health, education, and skills Migration

Developing world has lagged in its average levels of nutrition, Shift from agriculture to manufacturing and services
health, and education.
Although modernizing in many regions, rural areas are poorer
There are strong synergies (complementarities) between and tend to suffer from missing markets, limited information,
progress in health and education = under-5 mortality rates and social stratification.
improve (lesser deaths) as mothers’ education levels rise
A massive population shift from rural to urban areas, fueling
 Higher Levels of Inequality and Absolute Poverty rapid urbanization.

Very high levels of inequality (gap between rich and poor  Lower Levels of Industrialization and Manufactured
within individual developing countries) are found in many Exports
middle-income countries.
Industrialization - associated with high productivity and
Extreme poverty is due in part to low human capital but also incomes and has been a hallmark of modernization and
to social and political exclusion and other deprivations. national economic power

Development economists use the concept of absolute Developing nations tended to have a higher dependence on
poverty to represent a specific minimum level of income primary exports. Most developing countries have diversified
needed to satisfy the basic physical needs of food, clothing, away from agricultural and mineral exports to some degree.
and shelter in order to ensure continued survival = problem The low-income countries remain highly dependent on a
arises when these minimum subsistence levels vary from relatively small number of agricultural and mineral exports.
country to country and region to region
 Adverse Geography
 Higher Population Growth Rates
Geography must play some role in problems of agriculture,
Crude Birth Rate – number of children born alive each year public health, and comparative development more generally.
per 1,000 population
Developing countries are primarily tropical or subtropical,
and this has meant that they suffer more from tropical pests

3
and parasites, endemic diseases such as malaria, water smaller segment of society has been able to gain access to
resource constraints, and extremes of heat. and take advantage of economic opportunities. Problems
with governance and public administration, as well as poorly
Resource endowment - nation’s supply of usable factors of performing markets, often stem from poor institutions.
production, including mineral deposits, raw materials, and
labor

High mineral wealth is no guarantee of development success. Property rights - acknowledged right to use and benefit from
Conflict over the profits from these industries has often led a tangible (land) or intangible (intellectual) entity that may
to distribution of wealth, social strife, undemocratic include owning, using, deriving income from, selling, and
governance, high inequality, and even armed conflict, in what disposing
is called the “curse of natural resources.”

 Underdeveloped Markets
External Dependence:
Market underdevelopment lacks:
Developing nations have weaker bargaining positions than
1. a legal system that enforces contracts and validates developed nations in international economic relations
property rights
Developing nations often also voice great concern over
2. a stable and trustworthy currency
various forms of cultural dependence
3. an infrastructure of roads and utilities that results in low
transport and communication costs Developing nations are dependent on the developed world
4. a well-developed and efficiently regulated system of for environmental preservation, on which hopes for
banking and insurance sustainable development depend. Of greatest concern, global
5. substantial market information for consumers and warming is projected to harm developing regions more than
producers about prices, quantities, and qualities of developed ones; yet both accumulated and current
products and resources greenhouse gas emissions still largely originate in the high-
6. social norms that facilitate successful long-term business income countries.
relationships
Developing world endures what may be called environmental
Infrastructure – facilities enabling economic activity and dependence, in which it must rely on the developed world to
markets, such as transportation, communication and cease aggravating the problem and to develop solutions,
distribution networks, utilities, water, sewer, and energy including mitigation at home and assistance in developing
supply systems countries

Imperfect market – market in which the theoretical

assumptions of perfect competition are violated by the
existence of a small number of buyers and sellers, barriers to How Low-Income Countries Today Differ from Developed
entry, and incomplete information Countries in Their Earlier Stages

Incomplete information – absence of information that 1. Physical and Human Resource Endowments
producers and consumers need to make efficient decisions 2. Relative Levels of Per Capita Income and GDP
resulting in underperforming markets 3. Climatic Differences
4. Population Size, Distribution, and Growth
 Lingering Colonial Impacts and Unequal International
5. The Historical Role of International Migration
Relations Brain drain - emigration of highly educated and
skilled professionals and technicians from the
Colonial Legacy:
developing countries to the developed world
Despite important variations that proved consequential, 6. The Growth Stimulus of International Trade
colonial era institutions often favored extractors of wealth Free trade = “engine of growth. “ Trade in which
rather than creators of wealth, harming development then goods can be imported and exported without any
and now. barriers in the forms of tariffs, quotas, or other
restrictions
Developing countries have more often lacked institutions and Terms of trade - ratio of a country’s average export
formal organizations of the type that have benefited the price to its average import price.
developed world: Domestically, property rights have been
7. Basic Scientific and Technological Research and
less secure, constraints on elites have been weak, and a Development Capabilities
4
 Research and development (R&D) Scientific - take into account changes in inequality within
investigation with a view toward improving the countries as well as between them
existing quality of human life, products, profits,
factors of production, or knowledge Sectoral Convergence
8. Efficacy of Domestic Institutions - convergence in manufacturing = failure to find overall
Are Living Standards of Developing and Developed Nations convergence across countries is due to the small share
and slow growth of manufacturing employment in
Converging?
low-income countries
Divergence

- tendency for per capita income (or output) to grow

faster in higher-income countries than in lower- Long-Run Causes of Comparative Development
income countries
Economic Institutions
- the income gap widens across countries over time (as
was seen in the two centuries after industrialization - “Humanly devised” constraints that shape interactions
began). (or “rules of the game”) in an economy, including:
formal rules = embodied in constitutions, laws,
Convergence contracts, and market regulations
- tendency for per capita income (or output) to grow informal rules = reflected in norms of behavior and
faster in lower-income countries than in higher- conduct, values, customs, and generally accepted ways
income countries of doing things
- lower-income countries are “catching up” over time

Conditional Convergence

- countries are hypothesized to converge not in all cases

but other things being equal (particularly savings rates,
labor force growth, and production technologies)

Relative Country Convergence

- examine whether poorer countries are growing faster

than richer countries
- occurs when the income of the poor country weighted
by the ratio between the income of the rich country
and that of the poor country increases more than that
of the rich country

Absolute Country Convergence

- despite higher growth, income gains were still smaller

in absolute amount than in the OECD
- even when the average income of a developing
country is becoming a larger fraction of developed
country average incomes, the difference in incomes
can still continue to widen for some time before they
finally begin to shrink

Population-Weighted Relative Country Convergence

- weight the importance of a country’s per capita

income growth rate proportionately to the size of its
population

World-as-One-Country Convergence

- think of the world as if it were one country