Group 5

Comparative Perspective
on Developing Economies
 Group Mem bers

Registration Number Name

2018MS8070 J N N Dias

2018MS8093 M W Dulanjalee

2018MS8143 B S G S Hansika

2018MS8173 G A M C Jayarathna

2018MS8355 W P D N Prabhashi
• Present development economies’ Objectives of
current economic level and growth
potential using international
the Study
comparative statistics.
• Use world bank’s world
development indicators to consider
large statistical errors and biases in
international comparisons.
• Identify the measurements of human
capital in developing economies.
• Identify the impact of external debt
to the inflation
The major problems of national account statistics across countries in different

stages of economic development

. • Goods and services produced in households are mostly not included in

national income when consumed at home or when they are sold outside
the home.
• Theoretically considered capital formation activities not included in
national income.
• More subsistence-oriented economies are, the stronger the tendency is for
their income levels and investments to be underestimated relative to
market-oriented economies
• Difficult to select the countries that satisfy the objective criteria of both
regional representativeness and convenience in interregional comparisons.
Country GDP per capital converted by GDP per capita UNDP Human
current exchange rate converted by Development Index,
2000(USD) Average purchasing 2000
annual growth power
rate, 1965- parity,2000
2000
Africa (Sub-Saharan) 262 0.4 850
Ethiopia
Nigeria
99
324
0.2
0.1
770
860
0.327
0.462
Economic
Kenya 347 1.4 980 0.513
South Asia 440 2.4 2,493
Bangladesh 359 1.3 1,540 0.478
Pakistan
India
440
450
2.4
2.5
1,870
2,730
0.499
0.577
Growth &
East Asia 1151 5.9 4,063
Indonesia 738 4.1 2,970 0.684
China
Thailand
855
1,987
6.5
4.7
3,740
6,230
0.726
0.762 Structural
Korea, Rep. 9,818 6.3 14,720 0.882
Latin America (and Caribbean) 3,937 1.6 7,205
Peru 2,061 0.2 4,630 0.747
Brazil
Argentina
3,491
7,674
2.6
0.8
7,250
11,880
0.757
0.844
Change
High-income 27,202 2.6 26,803
France 22,166 2.4 23,490 0.928
UK 24,348 2.1 23,580 0.928
USA 34,761 2.1 33,960 0.939
Japan 37,560 3.7 25,280 0.933

Sri Lanka 869.70 3.1 4339.683 0.691

• Above table summarizes international comparison on macroeconomic
growth.

• A major problem in comparing national incomes across countries is how to

convert them from local currencies into comparable units.

• The commonly used procedure is conversion by exchange rates into US

dollars is known to underestimate the level of economic welfare in
developing economies relative to that of developed economies. The reason
is that market exchange rates are supposed to reflect purchasing power
parities with respect to tradable goods alone.
• This table shows comparisons in GDP per capital in 2000 between
series converted by exchange rates and those by purchasing power
parities (PPP) and Human Development Index(HDI).

• In Sri Lankan context per capital GDP is 869.70USD in 2000 and

average annual growth rate(1965-2000) is 3.1%.

• The GDP converted by PPP is 4339.683 in 2000.In 2000,Human

Development Index is 0.691.
• correlation coefficient is as high as
0.98 and Spearman's rank
correlation is even higher than 0.99.
• The average GDP per capital of
high-income economies increased
at the compound rate of about 2.6
per cent from 1965 to 2000.
• The wide income gap between
high-income economies and the
poorest ones has been widening
further.
• Problem emerge with how
appropriate the national account
statistics such as average GDP per
capita are to represent the levels of
economic development for the sake
of comparisons across countries.
 GDP HDI HDI and GDP
GDP is an aggregate of One such measure, which has In above graph Spearman's
goods and services recently gained high rank correlation coefficients
produced within the currency, is the Human between HDI and GDP per
domestic economy of a Development Index (HDI). capital are extremely high
nation, which are HDI is constructed as a Rank correlations are even
purchasable by its simple average of three
higher for all the 85
residents through markets indexes. countries for which HDIs are
for their consumption. 1.Life expectancy calculated for 2000 (0.99
GDP does not account for 2. The level of education with both of the two GDP
people's welfare series). The high correlation
associated with non- 3.GDP per capita in PPP between the HDI and the
market factors. But there GDP series is naturally
have been many attempts expected, because both life
HDI range- Minimum 0 to
to construct more general expectancy and educational
maximum 1
welfare measures by level are highly correlated
incorporating non- with GDP per capital.
economic factors.
Changes in Industrial Structure

• In high income economies, they reduced GDP shares in agricultural and

industrial sector and expanded in the service sector.
• These changes are consistent with the so-called Petty-Clark law.
• Industrialization in developing economies was promoted by using policies
such as government subsidy, credit and import substitution industrialization
policy.
 Changes In Sectorial Shares Of GDP In Selected Economies
1965 2000 • African region
Agriculture industri service Agriculture Industrial service
al expanded

High Income 5 43 52 2 29 70 industrial sector

UK 3 46 51 1 29 70 than in the Asian
USA 3 38 59 2 25 73
region.
South Asia 44 19 37 25 26 49
Bangladesh 53 11 36 25 24 51 • Sri Lankan
Sri Lanka 35 9 55 22 26 52 industrial sector
India 44 20 36 25 27 48
expanded from 9%
Africa 53 13 34 31 35 34
Ethiopia 58 14 28 52 11 37 in 1965 to 26% in
Nigeria 55 12 33 30 46 25 2000.
Shares of manufactures in
merchandise exports %
1965 2000
• The speed with which the export
Africa 2 6
structure changes in the domestic
South Asia 42 78 industrial structure, depends on
India 48 77 the structure of comparative
Sri Lanka 0.84 75
advantage base on relative
resource endowment.
High Income 69 81
UK 81 82 • By 2000 Sri Lanka has increased
USA 62 83 export share of manufactured
commodities.
East Asia 44 88
Latin America 9 44
• In general, to increase in the GDP shares of industry overtime, the export share of

manufactured commodities should increases parallel.

• East Asian economies experienced major increase in the export share of manufactured

commodities.

• East Asia continued to expand the share of its industrial sector after 1980.

• ISI policy failed by the beginning of 1980 and many countries adopt policy called

‘structural adjustment policies (SAP)’.

Capital formation and savings in economic growth

Growth in average income or product per capita results from increases

in the endowment of capital

ex: Machinery
Tangible capital factories
Inventory

Capital ex: Human

knowledge
Intangible capital Research and
development
• Investment or capital formation measures as an increment in tangible capital for
a given period.
• As the ratio of capital formation to GDP increases, the growth of capital stock
will accelerate.
• There is a positive correlation between ratio of capital formation to GDP and
real growth rate GDP per capita and it indicates that,

High savings High Investment Economic growth

And the reverse causality,

Fast income
High Investment High savings
growth
Ratio of domestic savings to GDP (average, %)

1965- 1981- Savings rates in East Asian economies were

1980 2000 higher than lower income countries in South
Africa n.a. 17.4 Asia and Africa, upper-middle economies in
Latin America and Higher income economies.
South Asia 14.3 18.1
From 1965-80 to 1981-2000 the rates of
East Asia 26.2 34.4 growth in savings were higher in East Asia
than in other regions.
Latin America 21.4 21.2

High income 25.5 22.8

countries
 External debt and inflation

Domestic Saving

Domestic Capital
Domestic Capital
Import

Net Capital Import = Domestic Investment - Domestic Saving

• This represents the net capital
imports measured by the I-S gap
relative to GDP per capita for
the periods 1965-80 and 1981-
2000.

• There is a inverse relationship is

between the two variables that
statistically significant, the
correlation coefficient is rather
low in some countries but most
correlation improves
significantly.
• An inverse relationship indicates the tendency of poor countries to rely
heavily on capital imports to finance their capital formation.
• High-income economies have shifted from net capital exporters to importers
to low-income economies with higher investment opportunities relative to
their savings capacity.
• The role of foreign capital imports is crucial in aiding capital formation in
developing economies.
• However, there is a risk of capital imports accumulating to bankruptcy
nationally, meaning that the borrowing country will not be able to meet its
debt-service obligations, including interest payments and principal
repayments.
 Arising inflationary pressure with capital import
• When the inflow of net capital
from the people fails to close
the end of the domestic I-S,
inflation acts as a foreign
pressure.
• The government seeks to
prevent inflationary pressures
by implementing fiscal and
monetary policies to curb
effective demand.
• If surplus investment is
financed by printing money,
inflation will rise.
• As long as inflation stays moderate
and stable, real economic growth
will not be harmed.
• As the inflation rate rises, the risk
of foreign investors incurring
losses increases as the domestic
currency depreciates.
• As a result, the inflow of foreign
capital should be reduced, which
will increase the need for
governments to print more money.
• In this way hyperinflation tends to
be reinforced in a vicious circle.
 Accumulation of Human Capital

Conventional forms of capital Formation

Economic growth performance

Non-conventional forms of capital Formation

Enhance the ability of human being Investment in human capital

 Measurement of Human capital
• Measurement of human capital can serve many purposes.
• Direct measures of human capital and its formation are not
available for international comparison over a wide range of
countries.
• Cross-country comparison is based on two proxies to reflect the
level of human capital accumulation.

1. Average number of years of schooling per person at ages 25

and higher
2. Average life expectancy at birth, or average number of years
from birth to death.
 Average schooling Formal Education

2 Proxies

Average life expectancy at

Health condition
birth
Countries Improvement of Average
schooling (1965-2000)
Improvement of Average life
expectancy at birth (1965-2000)
Improvements in education and
Africa 1.7 4 health in selected economies
Ethiopia 1.1 4
Nigeria N.A. 5
Kenya 2.8 0

South Asia 2.9 16 In 1965-2000 time

Bangladesh 1.6 19
Pakistan 1.5 16 period, African, South
India 3.3 16
Asian, East Asian,
East Asia 4.0 16
Indonesia 3.4 21 Latin American and
China 4.1 15
Thailand 3.0 13 high-income countries
Korea 6.0 17
have shown an
Latin America
Peru
2.2
4.2
12
19
increase in their
Brazil
Argentina
1.8
3.3
11
8
average schooling and
High Income 2.8 8
average life
France
UK
2.5
2.2
8
6
expectancy.
USA 3.0 7
Japan 11

World 2.5 11
 International comparison of two International comparison of two proxies with the annual
01 proxies with per capita GDP in 2000 02 growth rates of per capita GDP from 1965 to 2000

Increase in average schooling, 1965-2000)

Average schooling (years)

(yea rs )
Positive
correlation

Increase in Life expectancy, 1965-2000)

Life expectancy (years)

Growth rate of GDP per capita,1965-2000 (% per year)

(years)
GDP per capita covered by exchange rate (US$)

• Correlations calculated from the original observations at one time period (2000) higher
than correlations based on differences between the observations at two time period
(1965-2000)
 Low-income Economies

• There is the major dilemma faced by leaders in low-income

economies.
• As they are so poor, their future discount rates must be very
high.
• If returns to investment in education are so low in the short run,
is it appropriate to allocate a large share of affordable investment
to education?
Population,
Natural
Resources &
Foods
Natural Resources

There is no systematic
relationship can be found
between GDP and
Population per square
kilometer of territorial
area
Population pressure on
natural resources
The tendency towards faster
population growth in low-income
economies.

Some Asian economies were

successful in significantly curtailing
population growth rates from the
1965-80 to the 1980-2000 period.
Yet, Africa maintained a growth rate
of nearly 3 per cent per year even in
recent years. This rate is a doubling
of population every quarter of a
century.
 Population growth vs
Food Supply
Increased population pressure on
natural resources, which may make
low income economies
unsustainable, can be inferred from
trends in agricultural land area and
food production in Africa

developing economies have

responded to population growth by
opening new lands for cultivation.
Yet, expansion in agricultural land
area has failed to keep up with
rapid population growth.
positive correlation between
economic growth and food supply
was significant across developing
economies but not visible within the
group of high income economies,
implying that domestic food
production capacity ceases to be a
constraint on overall economic
development at the high-income
stage.
Thank you