ECONOMIC DEVELOPMENT
subtropical climatic zones while economically advanced
Prelim Lecture Notes 08
The difference between the developed countries in their early
stages and of the low-income countries today
The status of developing countries today is significantly different from
that of the present developed countries when they made a start on
their era of modern economic growth.
Eight significant differences in their initial conditions (developed and
developing countries):
Prelim Lecture Notes 09
a. Physical and human resource endowments
d.
- the current developing countries ae less endowed with
natural resources, though some developing countries are
lucky to have abundant supplies of petroleum, minerals, and
raw materials needed to meet world demand, however most
of the developing countries where large population resides
have a poorly endowed natural resources specifically in Asia.
Some developing countries specifically in Africa enjoys a vast
range of natural resources but high investment capital is
necessary to exploit them which until now inhibited by a
wide domestic conflict and attitudes of western nations
toward them.
- In case of human resources, Paul Romer said that developing
countries of today “are poor because their citizens do not
have access to the ideas that are used in industrial nations to
generate economic value”. According to Paul Romer, the
technology between rich and poor nations can be classified
into two components:1. Physical Object Gap which includes
factories, roads, machineries and others, 2. Idea Gap which
includes knowledge about transaction processes, worker
motivation, inventory control, market distribution, and
others. The Idea Gap which Thomas Homer Dixon referred to
as Ingenuity Gap which is about application of innovative
e.
ideas to solve practical social and technical problems lies at
the core of development divide between rich and poor
nations. It is necessary that a country has an ability to exploit
its own natural resources with the use of its own people’s
managerial and technical skills and ingenuity to achieve
sustain economic growth.
b. Relative levels of per capita income and GDP
- In comparison with what developed country had in 19th
century, the people living in most of today’s developing
countries have low level of per capita income. A large part of
population of developing countries today are living at a
minimum level of subsistence, though developed countries
also experienced such living conditions but it’s not as wide
and as large of a fraction of the population of today.
- The developed countries in their modern growth era are
economically advance than the rest of the world as such they
could take advantage of their relatively strong financial
position, while developing countries of today started their
growth process at the low end of international per capita
income level.
c. Climatic differences
- Most developing countries are located in the tropical and
countries are located in temperate zones. The extreme heat
and humidity pose significant problems such as soil quality
deterioration, depreciation of many natural goods, low
productivity of selected crops, weak regenerative growth of
forest, and poor health of animals. It also causes workers’
discomfort, weak health, and weaken desire in strenuous
physical work that contribute to their low productivity and
efficiency. A necessary development assistance should be
considered to alleviate such conditions.
Population size, distribution, and growth
- European and North American countries have natural
population growth rate of not more than 2% annually before
and during their early growth years. Western nations
experienced a slow rise in population growth. The increase
of their population growth rates resulted from decreasing
death rates and a slow rise in birth rates.
- Populations of many developing countries increases in
excess of 2.5 % in recent decades and increasing still at a fast
rate. Developing countries have a considerable high ratio of
person-to-land than the European nations in their early
growth years since population growth is concentrated in few
areas. In absolute size comparison, no nation that set out on
a long-term economic growth reached the present-day
population size of India or Egypt or Pakistan or Brazil nor
approached the natural rates of increase in comparison with
that of Bangladesh or Philippines or Kenya or Guatemala.
Many observers doubt whether high long-term growth rate
and industrial revolution of contemporary developed
countries could have been attained had their population
been expanding rapidly.
Role of International Migration
- The 19th and early 20th centuries are characterized by a
widespread and large-scale international migration of rural
populations. Periods of famine, pressure on land, and limited
economic opportunities in urban industry in countries like
Italy, Germany, Ireland had pushed unskilled rural workers to
migrate to labor scarce countries like North America and
Australia. Up to World War II, international emigration was
both distant and permanent. Since World War II,
international migration exists between European countries
which is both short distance and temporary in nature. The
driving force to such migration is the transfer of surplus labor
to labor shortage nations which is both permanent and
nonpermanent in nature. The labor migration gave rise to
dual benefits for the country the unskilled workers came
from: their home governments were relieved of the cost of
unemployment and at the same time earned a much-needed
foreign exchange from the remittances sent home by the
workers. The restrictive nature of immigration laws
nowadays became a debated issue globally. Yet despite the
restrictions migrations continues today either of illegal
migrants or documented migrants.
 - The present-day international migrations is characterized by
a migration of highly educated and skilled professionals and
technicians from developing countries to developed
countries, a brain drain. Majority of such migrants move on
a permanent basis which is a loss of valuable resources
necessary for future economic progress of developing
countries. Migration, if permitted, brings poverty-reducing
benefits both to migrants and their families and to those
relatives, left behind in the origin country, through
remittances. The brain drain can be brain gain if migration
encourages more people to acquire skills and knowhow.
f. The Growth Stimulus of International Trade
- European and North American nations, in 19th century, with
stable political structure and flexible institutions, were able
to participate in the dynamic growth of international trade
exchanges on the basis of relatively free trade (trade in which
goods can be exported without any barriers in the form of
tariffs, quotas, and other restrictions), free capital
movements, and the unfettered international migration of
unskilled labor surplus.
- Developing countries, in 20th century, encounter difficulties
to achieve rapid growth rate on the basis of world trade. The
exports expanded but not as fast as the exports of developed
countries, and their terms of trade (the ratio of the price
receive from exports and the price to pay for imports)
declined over decades as such export volume should grow
faster just to earn foreign currency for imports.
- Add up to it is that the world commodity prices are subject
to large and potentially destabilizing price fluctuations.
Moreover, when developing countries achieve low cost
production of competitive product with the developed
countries, the developing countries in turn resort to various
forms of trade restrictions such as tariff and nontariff
barriers. In recent years, some developing countries
benefited from expanded manufactures exports to
developed countries, particularly china and other east and
southeast Asian countries.
g. Basic Scientific and technological research and development
capabilities
- The process of scientific and technological advance in all its
stages, from product development to research, is
concentrated in the rich nations. Also, research funds flow
toward solving technological and economic problems of
concern rich nations for their own economic priorities and
resource endowments.
- When it comes to significant area of technological and
scientific research, developing nations are extremely in
disadvantageous position in comparison to developed
countries.
h. Efficacy
- The developed countries enjoy relatively stronger political
stability and flexible institutions. Even in their early
industrialization stage, they had economic rules in place that
provided relatively broad access to opportunity for those
who have entrepreneurial drive. While developing countries
inherited high inequality and poor institutions that facilitate
extraction rather than provide incentives for production
established by colonial powers. Today such extraction can be
carried out by local elites and foreign interest groups.
Prelim Lecture Notes 10
Living standards divergence and convergence between developed
and developing nations
Today, the ratio of real living standards between richest countries and
poorest countries approaches 100 to one. As noted by Lant Pritchett,
developed countries have enjoyed far higher rates of economic
growth averaged over two centuries than today’s developing
countries which is a process known as divergence (a tendency for per
capita income to grow faster in high-income countries than in lower-
income countries so that the income gap widens across countries
overtime. In comparing development performance among developing
countries and between developed and developing countries, we can
also consider that with strenuous economic development effort,
living standards between developed and developing nations will
exhibit convergence (the tendency of per capita income to grow faster
in lower-income countries than in higher-income countries so that
lower -income are catching up overtime).
Two possible reasons of “catching up” (convergence)
1. Technology transfer- moving immediately to high-productivity
techniques of production is possible or doable. It decreases the
time needed to double the output of worker.
2. Factor accumulation- in developed countries, the need for more
capital on output decline because of their existing high levels of
physical and human capital. Instead, a high investment rate
growth is expected in developing countries that will help
increase capital accumulation until equal levels of capital and
output per worker is achieved.
Development should be perceived as a multidimensional process
involving the reorganization and reorientation of entire economic and
social system that means beside improvements in incomes and
output it must include changes in institutional, social, administrative
structures and also popular attitudes, customs, and beliefs.
It is helpful to explore historical and intellectual evolution about how
and why development does and does not take place.