Comparative Economic

Development
Topic 2
• Among countries colonized by European powers during the past 500
years, those that were relatively rich in 1500 are now relatively
poor….The reversal reflects changes in the institutions resulting from
European colonialism. Acemoglu, Johnson, and Robinson.
• Emerging powers in the developing world are already sources of
innovative social and economic policies and are major trade,
investment, and increasingly development cooperation partners for
other developing countries.
• Productivity in US is 10 times higher than India and 50 times higher
than DRC.
• Similarly LE is higher in US than India and DRC.
• Women’s LR is 100% in US, 51% in India and 57% in DRC.
• Why so much disparity?
Common Features of the Developing World
• 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 populations but rapid rural-to-urban migration
• Lower levels of industrialization
• Adverse geography
• Underdeveloped financial and other markets
• Lingering colonial impacts such as poor institutions and often external
dependence.
World Bank’s Classification
• High income countries
(GNI per capita > US$12,376)
• Upper middle income Countries
(GNI per capita between $3,996 and $12,375)
• Lower middle income countries
(GNI per capita between $1,026 and $3,995)
• Low income countries
(GNI per capita < $1,025)
https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-
world-bank-country-and-lending-groups
Further Classifications
• 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.
• Severely indebted, moderately indebted, and less indebted countries
• UNDP’s Human capital classification
• Emerging market economies are those which are becoming more
advanced, usually by means of rapid growth and industrialization.
• They have lower per-capita income, above-average sociopolitical
instability, higher unemployment, and lower levels of business or
industrial activity relative to the developed world; however, they also
typically have much higher economic growth rates.
Basic Indicators of Development:
Real Income, Health, and Education
• Purchasing Power Parity
GDP: The total final output of goods and services produced by the
country’s economy within the country’s territory by residents and
nonresidents.
GNI: GDP plus factor incomes earned by foreign residents, minus
income earned in the domestic economy by nonresidents.
PPP: Calculation of GNI using a common set of international prices for
all goods and services, to provide more accurate comparisons of living
standards.
Indicators of Health and Education

• Life expectancy: the average number of years newborn children

would live under mortality risks at the time of their birth.
• Undernourishment: consuming too little food to maintain normal
levels of activity.
• Literacy rate: the fraction of adult males and females reported or
estimated to have basic abilities to read and write.
• There are variations even in the developing world.
The New Human Development Index
• An index measuring national socioeconomic development, based on
combining measures of education, health, and adjusted real income
per capita.
• It ranks each country on a scale of 0 (lowest HD) to 1 (highest HD)
based on three goals of development: a long and healthy life as
measured by life expectancy at birth; knowledge as measured by a
combination of average schooling attained by adults and expected
years of schooling for school-age children; and a decent standard of
living as measured by real per capita GDP PPP adjusted.
• The HDI currently ranks countries into four groups: low HD (0.0 to
0.535), medium HD (0.536 to 0.711), high HD (0.712 to 0.799), and
very high HD (0.80 to 1.0).
Characteristics of the Developing World
Lower Levels of Living and Productivity

• Differences b/w developed and developing world

• Differences b/w the developing world

• The vicious circle prevailing at low-income level: the poverty trap

• Population size and GNI per capita

Lower Levels of Human Capital
• Human capital—health, education, and skills—is vital to economic
growth and human development.
Higher Levels of Inequality and Absolute Poverty
• the poorest 20% of people receive just 1.5% of world income, which
translates to approximately 1.2 billion people living in extreme poverty
on less than $1.25 per day at PPP.
• Inequality b/w rich & poor countries.
• Inequality within the poor countries b/w the rich & poor.
o high inequality in middle income countries: LA & African countries,
resource rich developing countries.
o lower inequality in Asia.
• a large majority of the extreme poor live in the low-income developing
countries of sub-Saharan Africa and South Asia.
• extreme poverty: due to low human capital, social and political
exclusion and other deprivations.
• Absolute poverty: subsistence level depends upon regions.
• in 2015, 10% of the world’s population lived on less than US$1.90 a
day, down from nearly 36% in 1990. 736 million people lived on less
than $1.90 a day.
• East Asia and Pacific: 47 million extreme poor.
• More than half of the extreme poor live in Sub-Saharan Africa.
• The majority of the global poor live in rural areas, are poorly
educated, employed in the agricultural sector, and under 18 years of
age.
https://www.worldbank.org/en/topic/poverty/overview
Poverty headcount ratio at $1.90 a day (2011 PPP) (% of
population)
Higher Population Growth Rates
• Global population rose from just under 1 billion in 1800 to 1.65 billion in
1900 to 7 billion in 2012.
• Rapid population growth began in Europe. But in recent decades, most
population growth has been centered in the developing world.
• More than five-sixths of all the people in the world now live in
developing countries; and some 97% of net population growth (births
minus deaths) in 2012 took place in developing regions.
• From 1990 to 2008, population in the low-income countries grew at
2.2% per year, compared to 1.3% in the middle-income countries (the
high-income countries grew at 0.7% per year, reflecting both births and
immigration).
• The birth rate is about three times as high in the low-income countries
as in the high-income countries.
• Dependency burden The proportion of the total population aged 0 to
15 and 65+, which is considered economically unproductive and
therefore not counted in the labor force.
• The total dependency ratio is 72 per 100 in low-income countries and
49 per 100 in high-income countries.
• In rich countries, older citizens are supported by their lifetime savings
and by public and private pensions as opposed to poor countries.
Greater Social Fractionalization
• Significant ethnic, linguistic, and other social divisions within a
country.
• The greater the fractionalization in a country, the higher the internal
strife and political instability. Successful development experiences—
South Korea, Taiwan, Singapore, and Hong Kong—culturally
homogeneous societies.
• Ethnic and religious conflicts leading to widespread death and
destruction have taken place in countries such as Afghanistan, India,
Iraq, etc.
• Ethnic and religious diversity need not necessarily lead to inequality
for exp; Malaysia and USA
Larger Rural Populations but Rapid Rural-to-Urban Migration
• Shift from agriculture to manufacturing and services.
• In LDCs, higher share of the population lives in rural areas, and
correspondingly fewer in urban areas.
• Rural areas are poorer and tend to suffer from missing markets,
limited information, and social stratification.
• Massive population shift: new problems.
Lower Levels of Industrialization and Manufactured Exports
• Industrialization is associated with high productivity and incomes and has
been a hallmark of modernization and national economic power.
• Developing countries have a higher share of employment in agriculture
than developed countries.
• In developed countries, agriculture represents a very small share of both
employment and output—about 1% to 2% in Canada, the US and UK
• Although productivity is not below the average for these economies as a
whole. This is in sharp contrast to a majority of developing nations, which
have relatively low productivity in agriculture.
• Madagascar (82% vs 25%) and Indonesia (41% vs 14%).
• Over the years, the employment share in agriculture fell. Except for
Pakistan and Honduras*.
• Transition from industry to services sector in the developed world.
• Developing nations tended to have a higher dependence on primary
exports.
• Most developing countries have diversified away from agricultural and
mineral exports to some degree.
• The middle-income countries are catching up with the developed
world in the share of manufactured goods in their exports.
• The low-income countries, particularly those in Africa, remain highly
dependent on a small number of agricultural and mineral exports.
• Lack of diversification: vulnerability to shocks.
Adverse Geography
• Analysts argue that geography must play some role in problems of agriculture,
public health, and comparative development.
• Landlocked economies, common in Africa, often have lower incomes than coastal
economies.
• Developing countries are primarily tropical or subtropical, and this has meant that
they suffer more from tropical pests and parasites, endemic diseases such as
malaria, water resource constraints, and extremes of heat.
• Global warming can have the worst impact on south Asia and Africa.
• Favorable resource endowment: the oil rich gulf countries. Other extreme: Yemen,
Haiti, Bangladesh.
• Existence of natural resources can lead to conflict, inequality, and undemocratic
governance. Exp: DRC.
• Geography is not destiny; high-income Singapore lies almost directly on the equator,
and parts of southern India have exhibited enormous economic dynamism in recent
years.
Underdeveloped Markets
• Imperfect markets and incomplete information are prevalent in
developing countries which leads to inefficiencies.
• Markets are underdeveloped because LDCs lack
1. legal system to enforce contracts and validate property rights
2. a stable currency
3. infrastructure
4. financial facilities
5. information about prices and quantities
6. social norms that facilitate business
Lingering Colonial Impacts and Unequal International
Relations
• Most developing countries were once colonies of Europe
• Colonial era institutions often favored extractors of wealth rather than
creators of wealth.
• Developing countries have often lacked institutions and formal
organizations of the type that have benefited the developed world.
• Weak property rights, weak constraints on elites, and a small segment
of society has access to economic opportunities.
• The colonial powers determined that the institutions would facilitate
the exploitation of human and other resources for the benefit of the
colonizing elite.
External Dependence
• Developing countries have also been less well organized and
influential in international relations
• Developing nations have weaker bargaining positions than developed
nations in international economic relations.
• Developing nations are also dependent on the developed world for
environmental preservation*.
• Foreign Aid
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
• Climate
• Population size, distribution, and growth
• Historic role of international migration
• International trade benefits
• Scientific/technological research
• Efficacy of domestic institutions
Physical and Human Resource Endowments
• Less natural endowments to begin with than their counterparts
• Require high investments and capital to exploit resources
• Inefficient domestic human resources and imperfect markets

Relative Levels of Per Capita Income and GDP

• Lower per capita income (compared to 19th century).
• Majority population live at the subsistence level.
• The developed countries were ahead of the rest of the world in their
earlier stages of development.
Climatic Differences
• LDCs are situated in tropical or subtropical climatic zones.
• Economically successful countries are located in the temperate zone.
• Extreme heat and its consequences for health and productivity.
• Infectious diseases.
• Exploited by the colonialists (extractive institutions).

Population Size, Distribution, and Growth

• Western nations experienced a slow rise in population growth (<2%).
• Growth rate is on average 2.5% for LDCs.
The Historical Role of International Migration
• Migration of Europeans to America
• Ongoing in 20th century
• Emigration of south Asians to the middle east
• Brain drain
• They take our jobs!
• Transfer of technology

The Growth Stimulus of International Trade

• The developed countries benefited from industrialization and free trade.
• Inability to generate growth from trade.
• Unfavorable terms of trade.
• Export of primary products.
R&D
• Scientific investigation with a view toward improving the existing
quality of human life, products, profits, factors of production, or
knowledge.
• R&D is heavily concentrated in the DCs with exceptions of China and
India.

Efficacy of Domestic Institutions

• Efficacy of domestic economic, political, and social institutions.
• Extractive institutions encouraged by the colonial era.
• Political instability
Are Living Standards of Developing and Developed Nations
Converging?
• Divergence: A tendency for per capita income to grow faster in HICs
than in LICs so that the income gap widens across countries over time.
• Convergence: The tendency for per capita income to grow faster in
LICs than in HICs so that LICs are “catching up” over time.
Relative Country Convergence
• Examine if the poor countries are growing > rich countries
• If yes then they are on the path to ‘catch up’
• The relative gap in incomes would shrink
• The average income in China and DRC as % of USA’s income
• No convergence across countries
• MICs have been growing faster than LICs
• Poor developing countries are not catching up
Absolute Country Convergence
• Recent rapid growth in China, and the acceleration of growth in South
Asia, these regions are currently on a path of relative country
convergence.
• Due to their relatively low
starting income levels,
despite higher growth,
income gains were still smaller
in absolute amount than in the OECD.
Pakistan and Bangladesh
• West Pakistan separated in 1971
• William Easterly declared Pakistan a leading example of “growth
without development,” with low social indicators for its income and
growth.
• Meanwhile, Bangladesh still poor, has been transforming itself from a
symbol of famine to a symbol of hope.
• Drained of revenues to benefit west Pakistan, the fight for
independence, economic destruction, the 1971 war, and the famine
left scars.
• Although, income is low in Bangladesh, still it outperformed Pakistan
in social indicators such as the HDI.
• According to the WBR 2013, 23% population lives below PL in Pak
compared to 51% in Bangl.
• The countries were able to reduce poverty due to the green
revolution, the role of the NGOs, the empowerment of women in the
industrial sector, and foreign remittances.
• The two countries ranked close of the MDPI index.
• Better performance in female LR than Pak (40% vs 53%).
• LE 69 vs 65 in Pak.
• Easterly concludes that part of the cause of Pakistan’s “fractionalism
lies in ethnolinguistic fractionalization” and argues that “Pakistan is
the poster child for the hypothesis that a society polarized by class,
gender, and ethnic group does poorly at providing public services.”
• In 2013, Bangladesh received a gender equity index ranking of 0.55,
much higher than the Pakistan score of just 0.29.
• Pakistan was able to achieve high growth with low investment in
human capital.
• Bangl did well in social indicators even though it was established in
1971.