Lecture 2

Comparative
Economic
Development
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-1
Chapter 2: Comparative Economic Development
• In this chapter, we will study the comparative economic development.

• Learning Outcomes are:
1. Defining the developing world
2. Basic Indicators of Development: Real Income, Health, and Education
3. Describing how development is measured so as to allow for quantitative
comparisons across countries.
4. How low-income countries today differ from developed countries in
their earlier stages
5. Long-run causes of comparative development

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Common characteristics of developing countries
• These features in common are on average and with great

diversity, in comparison with developed countries:
– Lower levels of living and productivity
– Lower levels of human capital
– Higher levels of inequality and absolute poverty
– Higher population growth rates
– Greater social fractionalization
– Larger rural population - rapid migration to cities
– Lower levels of industrialization and manufactured
exports
– Adverse geography
– Underdeveloped financial and other markets
– Colonial Legacies - poor institutions etc.

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2.1 Defining the Developing World
• The most common way to define the

developing world is by per capita income.
• Several international agencies, including the
Organization for Economic Cooperation and
Development (OECD) and the United Nations,
offer classifications of countries by their economic
status, but the best-known system is that of the
International Bank for Reconstruction and
Development (IBRD), more commonly known
as the World Bank.

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•World Bank Scheme- ranks countries on

GNP/capita
– LIC, LMC, UMC, OECD (see Table 2.1)

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• In the World Bank’s classification system, 213

economies with a population of at least 30,000
are ranked by their levels of gross national
income (GNI) per capita.
• These economies are then classified as low-
income countries (LICs), lower-middle-income
countries (LMCs), upper middle- income countries
(UMCs), high-income OECD countries, and other
high-income countries.

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• Low-income countries: In the World Bank

classification, countries with a GNI per capita of
less than $1,025 in 2011.
• Lower-middle-income countries have incomes
between $1,026 and $4,035
• Upper-middle-income countries have incomes
between $4,036 and $12,475;
• High-income countries have incomes of
$12,476 or more.

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• Newly industrializing countries (NICs)

Countries at a relatively advanced level of
economic development with a substantial and
dynamic industrial sector and with close links to
the international trade, finance, and investment
system.
• Least developed countries A UN designation of
countries with low income, low human capital,
and high economic vulnerability.

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Table 2.1 Classification of Economies by Region and
Income, 2010

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Table 2.1 Classification of Economies by Region and Income,
2010 (continued)

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Table 2.1 Classification of Economies by Region and Income,
2010 (continued)

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2.2 Basic Indicators of Development: Real
Income, Health, and Education
• Gross National Income (GNI)

• Gross Domestic Product (GDP)
• PPP method instead of exchange rates as
conversion factors (see Figure 2.2)

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income per capita adjusted for purchasing
power
• In accordance with the World Bank’s income-based

country classification scheme, gross national income
(GNI) per capita, the most common measure of the
overall level of economic activity, is often used as a
summary index of the relative economic well-being of
people in different nations.
• Gross national income (GNI): The total domestic
and foreign output claimed by residents of a country,
consisting of gross domestic product (GDP) plus factor
incomes earned by foreign residents, minus income
earned in the domestic economy by nonresidents.

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power
• Depreciation (of the capital stock) The

wearing out of equipment, buildings,
infrastructure, and other forms of capital,
reflected in write-offs to the value of the capital
stock.
• Capital stock The total amount of physical goods
existing at a particular time that have been
produced for use in the production of other goods
and services.

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power
• GNI is calculated as the total domestic and foreign

value added claimed by a country’s residents
without making deductions for depreciation (or
wearing out) of the domestic capital stock.
• Gross domestic product (GDP) measures the
total value for final use of output produced by an
economy, by both residents and nonresidents

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power
• Per capita GNI comparisons between developed and

less developed countries like those shown in Figure 2.2
are, however, exaggerated by the use of official
foreign-exchange rates to convert national
currency figures into U.S. dollars.
• This conversion does not measure the relative
domestic purchasing power of different currencies.
• In an attempt to rectify this problem, researchers have
tried to compare relative GNIs and GDPs by using
purchasing power parity (PPP) instead of exchange
rates as conversion factors

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2.2 Purchasing Power Parity
• Purchasing power parity (PPP) Calculation of

GNI using a common set of international prices
for all goods and services, to provide more
accurate comparisons of living standards.

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Figure 2.2 Income Per Capita in Selected Countries
(2008)

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Table 2.2 A Comparison of Per Capita GNI, 2008

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2.3 Holistic Measures of Living Levels and
Capabilities
• Health
• Life Expectancy
• Education
• HDI as a holistic measure of living levels
•
• HDI can be calculated for groups and regions in a

country
– HDI varies among groups within countries
– HDI varies across regions in a country
– HDI varies between rural and urban areas

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Table 2.3 Commonality and Diversity: Some
Basic Indicators

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Figure 2.3 Human Development Disparities within
Selected Countries

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Figure 2.3 Human Development Disparities within
Selected Countries (continued)

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Table 2.4 2009 Human Development Index
for 24 Selected Countries (2007 Data)

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Table 2.5 2009 Human Development Index
Variations for Similar Incomes (2007 Data)

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2.3 Holistic Measures of Living Levels and
Capabilities
• The New Human Development Index

• Introduced by UNDP in November 2010

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What is new in the New HDI?
1. Calculating with a geometric mean
• Probably most consequential: The index is now computed

with a geometric mean, instead of an arithmetic mean
• A geometric mean is also used to build up the overall
education index from its two components
• Traditional HDI added the three components and divided by
3
• New HDI takes the cube root of the product of the three
component indexes
• The traditional HDI calculation assumed one component
traded off against another as perfect substitutes, a strong
assumption
• The reformulation now allows for imperfect substitutability

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What is new in the New HDI?
2. Other key changes:
• Gross national income per capita replaces gross domestic

product per capita
• Revised education components: now using the average
actual educational attainment of the whole population, and
the expected attainment of today’s children
• The maximum values in each dimension have been
increased to the observed maximum rather than given a
predefined cutoff
• The lower goalpost for income has been reduced due to new
evidence on lower possible income levels

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Table 2.6
The 2010
New Human
Development
Index
(NHDI), 2008
Data

2-29
2.4 Characteristics of the Developing World:
Diversity within Commonality
1. Lower levels of living and productivity

2. Lower levels of human capital (health,
education, skills)
3. Higher Levels of Inequality and Absolute
Poverty
–Absolute Poverty
–World Poverty
4. Higher Population Growth Rates
–Crude Birth rates

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Figure 2.4 Shares of Global Income, 2008

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Table 2.7 The 12 Most and Least Populated Countries
and Their Per Capita Income, 2008

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Figure 2.5 Under-5 Mortality Rates, 1990 and 2005

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Table 2.8 Primary School Enrollment and Pupil-
Teacher Ratios, 2010

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Figure 2.6 Correlation between Under-5 Mortality
and Mother’s Education

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Figure 2.7 Number of People Living in
Poverty by Region, 1981–2005

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Table 2.9 Crude Birth Rates Around the
World, 2009

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5. Greater Social Fractionalization

6. Larger Rural Populations but Rapid Rural-
to-Urban Migration
7. Lower Levels of Industrialization and
Manufactured Exports
8. Adverse Geography
– Resource endowments

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Table 2.10 The Urban Population in Developed
Countries and Developing Regions

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Table 2.11 Share of the Population Employed in the
Industrial Sector in Selected Countries, 2004-2008
(%)

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9. Underdeveloped Financial and Other

markets
– Imperfect markets
– Incomplete information
10. Colonial Legacy and External
Dependence
– Institutions
– Private property
– Personal taxation
– Taxes in cash rather than in kind
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2.5 How Low-Income Countries Today Differ
from Developed Countries in Their Earlier Stages
• Eight differences
– Physical and human resource endowments
– Per capita incomes and levels of GDP in relation to the
rest of the world
– Climate
– Population size, distribution, and growth
– Historic role of international migration
– International trade benefits
– Basic scientific/technological research and development
capabilities
– Efficacy of domestic institutions

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2.6 Are Living Standards of Developing
and Devolved Nations Converging?
• Evidence of unconditional convergence is

hard to find
• But there is increasing evidence of “per
capita income convergence,” weighting
changes in per capita income by population
size

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Figure 2.8 Relative Country Convergence: World,
Developing Countries, and OECD

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Figure 2.8 Relative Country Convergence: World,
Developing Countries, and OECD (cont’d)

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Figure 2.9 Growth Convergence versus Absolute
Income Convergence

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Figure 2.10 Country Size, Initial Income
Level, and Economic Growth

2-47
2.7 Long-Run Causes of Comparative
Development
• Schematic Representation
– Geography
– Institutional quality- colonial and post-colonial
– Colonial legacy- pre colonial comparative
advantage
– Evolution and timing of European development
– Inequality- human capital
– Type of colonial regime

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Figure 2.11 Schematic Representation of Leading
Theories of Comparative Development

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Nature and Role of Economic
Institutions
• Institutions provide “rules of the game” of economic life
• Provide underpinning of a market economy
• Include property rights; contract enforcement
• Can work for improving coordination,
• Restricting coercive, fraudulent and anti-competitive
behavior
• Providing access to opportunities for the broad population-
• Constraining the power of elites, and managing conflict
• Provision of social insurance
• Provision of predictable macroeconomic stability

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Role of Institutions
• Acemoglu, Johnson, and Robinson’s

“reversal of fortune” and extractive
institutions
• Bannerjee and Iyer, “property rights
institutions.” Landlords versus cultivators

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Concepts for Review
• Absolute poverty • Economic Institutions

• Brain drain • Fractionalization
• Capital stock • Free trade
• Convergence
• Gross domestic product
• Crude birth rate
(GDP)
• Dependency burden
• Depreciation (of the capital • Gross national income
stock) (GNI)
• Diminishing Marginal Utility • Human capital
• Divergence • Human Development Index
(HDI)

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Concepts for Review (cont’d)
• Imperfect market • Purchasing power parity

• Incomplete information (PPP)
• Infrastructure • Research and development
• Least developed countries (R&D)
• Low-income countries • Resource endowment
(LICs) • Terms of trade
• Middle-income countries • Value added
• Newly industrializing • World Bank
countries (NICs)

2-53

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Comparative

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• In this chapter, we will study the comparative economic development.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• These features in common are on average and with great

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• The most common way to define the

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

•World Bank Scheme- ranks countries on

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• In the World Bank’s classification system, 213

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• Low-income countries: In the World Bank

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• Newly industrializing countries (NICs)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• Gross National Income (GNI)

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• In accordance with the World Bank’s income-based

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• Depreciation (of the capital stock) The

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• GNI is calculated as the total domestic and foreign

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• Per capita GNI comparisons between developed and

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• Purchasing power parity (PPP) Calculation of

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• HDI can be calculated for groups and regions in a

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• The New Human Development Index

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• Probably most consequential: The index is now computed

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• Gross national income per capita replaces gross domestic

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Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

1. Lower levels of living and productivity

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5. Greater Social Fractionalization

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9. Underdeveloped Financial and Other

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• Evidence of unconditional convergence is