ECONOMIC DEVELOPMENT III.

RICH AND POOR COUNTRIES

I. THREE VIGNETTES  First, second, third world

 Developed and developing countries
 Malaysia
 Emerging economies and industrialized countries
 Ethiopia
 World Bank’s Four-Part Classification
 Ukraine
o Low-income economies – with average incomes less
II. DEVELOPMENT AND GLOBALIZATION than $1,005 per capita, converted into dollars at the
current exchange rate
 Malaysia, Ethiopia, and Ukraine o Lower-middle income economies - with incomes
 Economic globalization - the integration of national economies between $1,006 and $3,975
into the international economy through trade in goods and o Upper-middle-income economies - with incomes
services, direct foreign investment, short-term capital flows, between $3,976 and $12,275
international movements of people, and flows of technology. o High-income economies - with incomes over $12,275

II. DEVELOPMENT AND GLOBALIZATION IV. GROWTH AND DEVELOPMENT

Issues Central to the Process of Economic Development  Economic Growth - a rise in national or per capita income

 How do governments promote investment, industrialization, and  Economic Development - implies more—particularly,
exports? improvements in health, education, and other aspects of human
welfare
 How do countries educate their citizens and protect their health,
enabling them to become productive workers?  Modern Economic Growth - the key element has been the
application of science to problems of economic production,
 Who benefits from foreign investment and integration with
which in turn has led to industrialization, urbanization, and even
global trading networks, and who loses?
explosive growth in population.
 How does the shift from agriculture to manufacturing affect the
V. THE STUDY OF ECONOMIC DEVELOPMENT
lives of the majority of people in developing countries who still
are rural and poor?  The economics you have studied before is an important
foundation for the study of development economics. Be prepared
 How will climate change affect the lives of those who already
to build on it.
face extreme poverty?
SUMMARY
 The last 40 years have seen a wide diversity of development
experiences around the world.
 Many different terms are used to differentiate poor from rich
countries.
 Economic growth refers to an increase in per capita incomes,
whereas economic development involves, in addition,
improvements in health and education and major structural
changes.
 No single factor is responsible for poverty, and no single policy
or strategy can set in motion the complex process of economic
development.
 We must also be aware that new forces, from new diseases to
new technologies, will influence the path and opportunities
facing today’s developing nations.
 The economics of development bears a lot in common with the
economics you may have studied in other courses. But it is also
different. Context matters.
ECONOMIC GROWTH: CONCEPT AND PATTERNS
I. DIVERGENT PATTERNS OF ECONOMIC GROWTH
SINCE 1960
 In 1960, the annual income of the average Zambian was
almost twice as high as that of the average Thai, around
$1,800 in Zambia and $960 in Thailand in constant 2005
purchasing power parity (PPP) dollars.
 Since that time, Thailand achieved very rapid economic
growth of around 4.3 percent per person per year, so that the
average income in Thailand is now around $7,800.
 In Zambia, by contrast, average income actually fell slightly
to $1,765, about 2 percent lower than in 1960.
 Life expectancy remained at around 45 years, pulled down to
a large extent because of the dramatic spread of the
HIV/AIDS pandemic in the 1990s
II. FACTOR ACCUMULATION, PRODUCTIVITY, AND
ECONOMIC GROWTH
 Economists have been trying to understand the determinants of
economic growth and the characteristics that distinguish fast-
growing from slower-growing countries
 More than 200 years later, our knowledge about the growth
process has expanded but is far from complete
 A broad range of factors could plausibly be important to growth,
including the amount and type of investment, education and
healthcare systems, natural resources and geographical
endowments, the quality of government institutions, and the
choice of public policy
 At the core of most theories of economic growth is a relationship
between the basic factors of production—capital and labor—and
total economic production
 In turn, increasing the amount of production—that is, economic
growth—depends on increasing the amount of capital and labor
available and increasing the productivity of those assets.
 Economic growth depends on two basic processes:
o Factor accumulation
o Productivity growth
 Factor accumulation
o increasing the size of the capital stock or the labor force
 Productivity growth
 o increasing the amount of output produced by each
machine or worker
o efficiency
o technological change
III. SAVING, INVESTMENT, AND CAPITAL ACCUMULATION
 Solow growth model
o model of economic growth that analyzes changes in the
level of output in an economy over time as a result of
changes in the population growth rate, the savings rate,
and the rate of technological
 Key ideas
o New investment increases the capital stock.
o Investment is financed by saving.
o Saving comes from current income
 Generating saving and investment is necessary for growth, it is
not sufficient
 Sustaining economic growth requires both generating new
investment and ensuring that the investment is productive
IV. CHARACTERISTICS OF RAPIDLY GROWING
COUNTRIES
 The most rapidly growing developing countries tend to share six
broad characteristics
o Macroeconomic and political stability
o Investment in health and education
o Effective governance and institutions
 The most rapidly growing developing countries tend to share six
broad characteristics
o Favorable environment for private enterprise
o Trade, openness, and growth
o Favorable geography
 Macroeconomic and political stability
o Stability is good for growth
 Investment in health and education
o Countries with longer life expectancy (and therefore
better health) tend to grow faster, after accounting for
other factors affecting growth
o A higher life expectancy might also boost saving and
capital accumulation because businesses may be more
likely to invest where workers are healthier and more
productive
 Effective governance and institutions
o Stronger governance and institutions help improve the
environment for investment by reducing risk and
increasing profitability.
 o A higher life expectancy might also boost saving and
capital accumulation because businesses may be more
likely to invest where workers are healthier and more
productive
MEASURING ECONOMIC GROWTH AND DEVELOPMENT
I. MEASURING ECONOMIC GROWTH
 Gross national product (GNP)
o the sum of the value of finished goods and services
produced by a society during a given year.
o excludes intermediate goods (goods used up in the
production of other goods, such as the steel used in an
automobile or the chips that go into a computer)
 Gross national product (GNP)
o counts output produced by citizens of the country,
including the value of goods and services produced by
citizens who live outside its borders
 Gross domestic product (GDP)
o similar to GNP, except that it counts all output produced
within the borders of a country, including output
produced by resident foreigners, but excludes the value
of production by citizens living abroad
 Real GDP
o per capita gross domestic product adjusted for domestic
price inflation.
 Value added
o incremental gain to the price of a product at a particular
stage of production
II. SOME ISSUES IN MEASURING GDP
 In most developing countries, a large number of activities do not
enter the market
 Government agencies in poor countries may lack the means to
conduct thorough market surveys of prices or may rely too heavily
on information from major urban centers
 GDP may be a measure of the goods and services produced by an
economy, but does not account for the “bads” society produces
 Gross domestic product also does not account for the depreciation of
goods or depletion of natural resources
III. ECONOMIC DEVELOPMENT
 Economic growth has the potential for all people to become much
better off without anyone becoming worse off.
 Economic growth, however, is not a sufficient condition for
improving mass living standards for several reasons.
 Four broad factors that affect how well income can be converted into
“the capability to live a minimally acceptable life”
1. Personal heterogeneities
2. Environmental diversities
3. Variations in social climate
4. Differences in relative deprivation
IV. MEASURING ECONOMIC DEVELOPMENT
 The UNDP published its first human development report in 1990
with “the single goal of putting people back at the center of the
development process.”
 Human Development Index (HDI) combines outcomes with different
units of measurement—years of life expectancy, years of schooling,
and dollars of income
V. MILLENIUM DEVELOPMENT GOALS
 In September 2000, 189 nations adopted the “United Nations
Millennium Declaration,” a broad-reaching document that states a
commitment “to making the right to development a reality for
everyone and to freeing the entire human race from want.
 Eight (8) Goals
Goal 1. Eradicate extreme poverty and hunger.
Goal 2. Achieve universal primary education.
Goal 3. Promote gender equality and empower women.
 Understanding the process of economic development requires
methods of measuring economic performance across countries
and over time.
 For cross-country comparisons, GDP per capita is best measured
in terms of purchasing power parity (PPP)
 Unlike economic growth, which is a relatively objective measure
of economic capacity, economic development is a normative
concept.
 Citizens of rich nations can engage in a debate over whether
further economic growth will advance their well-being, but this
is not a meaningful debate for poor nations.

Goal 4. Reduce child mortality.

Goal 5. Improve maternal health.

Goal 6. Combat HIV/AIDS, malaria, and other diseases.

Goal 7. Ensure environmental sustainability.

Goal 8. Develop a global partnership for development

V. IS ECONOMIC GROWTH DESIRABLE?

 Easterlin paradox
o often referred to as the study of happiness
 Recent research suggests that happiness and income levels are
correlated, implying that economic growth improves happiness

SUMMARY