Comparative Economic Development · 2.1 Defining the Developing World •World Bank Scheme- ranks...

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Chapter 2

Comparative

Economic

Development

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-2

Common Characteristics of

developing (poor) countries

1. Lower levels of living and productivity

2. Lower levels of human capital

3. Higher levels of inequality and absolute poverty

4. Higher population growth rates

5. Greater social fractionalization

6. Larger rural population- rapid migration to cities

7. Lower levels of industrialization and manufactured exports

8. Adverse geography

9. Underdeveloped financial and other markets

10. Colonial legacies (?) - poor institutions etc.


Defining the Developing World

• World Bank Scheme – Atlas Method:

• Ranks countries on GNI/capita ($US at exchange rates)

– LIC: <$875

– LMC: $876 -$3,465

– UMC: $3,466 - $10,725

– High Income: >$10,725

– Figures are for 2005; US = $43,650

2.1 Defining the Developing World

• World Bank Scheme- ranks countries on

GNP/capita

– LIC, LMC, UMC, OECD (see Table 2.1 and

Figure 2.1)

• Calculated based on exchange rates, e.g.

– China’s GNP/capita = RMB21,000/capita

– Exchange Rate: 7 RMB = $ 1

– => China’s GNP/capita = $3,000/capita

Figure 2.2 Income Per Capita in Selected Countries

(2008)

Alternatively, convert to common currency using

Purchasing Power Parity

• PPP method instead of exchange rates as

conversion factors (see Figure 2.2)

• PPP method better represents what people

can actually buy with their income

Table 2.2 A Comparison of Per Capita GNI, 2008

Why do these methods differ?



• Think:

– What is the “Law of One Price?”

– Where/when does it apply/not apply?



• Think:

– What is the “Law of One Price?”

– Where/when does it apply/not apply?

• Answer:

– Wages are lower in DCs

– Services are both non-traded AND labor

intensive

– Ergo: Services cost less in DCs



UN Human Development Index

• HDI as a holistic measure of living levels

– 1/3*Log (GDP/capita at PPP)

– 1/3*Life Expectancy Index

– 1/3*(2/3*Adult Literacy+1/3*Enrollment Index)


Figure 2.5 Under-5 Mortality Rates,

1990 and 2005


Table 2.7 Primary School Enrollment

and Pupil-Teacher Ratios


Figure 2.6 Correlation between Under-

5 Mortality and Mother’s Education

Correlations

• Components of HDI are highly correlated

with each other

• “Best” single measure of development is

GNI/capita at PPP????

– www.gapminder.org


http://www.gapminder.org/


UN Human Development Index

• HDI as a holistic measure of living levels

– 1/3*Log (GDP/capita at PPP)

– 1/3*Life Expectancy Index

– 1/3*(2/3*Adult Literacy+1/3*Enrollment Index)

• HDI varies across countries

– HDI also varies for groups within countries

– HDI also varies by region in a country

– HDI also reflects rural-urban differences


Figure 2.3 Human Development

Disparities within Selected Countries


Figure 2.3 Human Development Disparities

within Selected Countries (continued)


10 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


Figure 2.7 People Living in Poverty,

1981-2002


Pinkovskiy and Sala-i-Martin

(2009) NBER 15433

• Go to


Pinkovskiy and Sala-i-Martin

(2009) NBER 15433

Figure 2.7 Number of People Living in Poverty by

Region, 1981–2005

Changing Poverty Rates

Depend on …

• Percentage of Population versus Absolute

Numbers

• Region: Tremendous progress in East Asia,

esp. China. Slower progress -- if any – in

other regions.

• Why????





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

– Landlocked


Urban and Farm Populations: USA

0

20

40

60

80

Perc

ent o

f Pop

ulat

ion

1790 1840 1890 1940 1990

New Old Farm


Income and Urbanization

$100

$1,000

$10,000

$100,000G

DP

/Cap

ita (L

og S

cale

)

0 20 40 60 80 100Urbanization (%)WDI (2003)


Income and Urban: China

0

5000

10000

15000

20000

25000

30000G

DP

/Cap

ita (2

000)

10 20 30 40 50 60 70 80 90Urban Population (%)

SHA

BEI

TIA

ZHE

JSUFUJ GDNLIA

SDNHEI

HUBHEB XIN JILHAIMONHUNHEN QINANH SAXJIASIC NINSAAYUNGXITIB

GANGUI

Chen (2002)


Urban-Rural Income Ratio: China

1.8

2.0

2.2

2.4

2.6

2.8

3.0

1978 1983 1988 1993 1998Chen (2002)


Income and Agricultural

Employment

$1,000

$10,000

$100,000

GDP/

Capi

ta (L

og S

cale

)

0 10 20 30 40 50 60Agricultural Employment (% of Total)WDI (2003)




• 9. Underdeveloped Financial and Other

markets

– Imperfect markets

• Labor, goods, financial

• Importance of clan or family relationships

– Incomplete information

• Prices: Cell phones




• 10a. Institutions

– Legal: Secure property rights; enforceable contracts

– Government:

• Civil War

• Dictatorship/Oligarchy: Responsive to elites vs.

• Democracy: Responsive to broader population

• Bureaucracy: Unresponsive

– Central Planning vs. Market Oriented

• East vs. West Germany; North vs. South Korea




• 10b. Institutions – Colonial Legacy?

– Extractors of Wealth vs. Creators of Wealth

• Climate: Inhospitable => Extractors

• Gold, oil, diamonds, etc. => Extractors

– “Post-colonial elites in many developing countries took

over the exploitive role formerly played by the colonial

powers.” (p. 68)

• But: Never colonized countries also face

problems: Afghanistan, Ethiopia, Liberia, Myanmar


Convergence?

• Are world incomes becoming more equal?

• Specifically, are DCs “catching up” with rich

countries?

• More specific yet: Is the growth rate of

income per capita negatively related to the

level of income per capita?


Convergence: US State Incomes Barro and Sala-I-Martin (1992)


2.0%

2.5%

3.0%

3.5%

4.0%

4.5%G

row

th R

ate

of In

com

e pe

r Cap

ita

$6,000 $10,000 $14,000Per Capita Income (1959)

AL

AZ

AR

CA

CO

CT

DE

FL

GA

ID

IL

IN

IAKS

KY

LA

ME

MD

MA

MI

MN

MS

MOMT

NE

NV

NH

NJNM

NY

NC

ND

OH

OK

ORPA

RI

SC

SD

TN

TX

UT

VT

VA

WA

WV

WI

WY

Convergence: 1959-79


Figure 2.8 Convergence among OECD

Countries but Divergence in the World

as a Whole


Figure 2.9 Per Capita GDP Growth in

125 Developing Countries, 1995-2005


Figure 2.10 Growth Convergence and

Absolute Income Convergence

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


Role of Institutions

• Acemoglu, Johnson, and Robinson’s

“reversal of fortune” and extractive

institutions

• Bannerjee and Iyer’s , “property rights

institutions”. Landlords versus cultivators


Case Study: Pakistan


Case Study: Bangladesh


Concepts for Review

• Absolute poverty

• Brain drain

• Crude birthrate

• Convergence

• Death rate

• Dependency burden

• Developed world

• Economic Institutions

• Foreign exchange

• Gross domestic product (GDP)

• Gross national product

(GNP)

• Human Development

Index (HDI)

• Imperfect markets

• Income gap

• Income inequality

• Incomplete information


Concepts for Review (cont’d)

• Infant mortality rate

• International poverty

line

• Labor productivity

• Least developed

countries (LLDCs)

• Levels of living

• Low income countries

(LICs)

• Malnutrition

• Middle-income

countries (MICs)

• Mixed economic

systems

• Newly industrialized

countries (NICs)

• Physical resources


Concepts for Review (cont’d)

• Primary industrial

sector

• Production function

• Purchasing power

equivalent

• Purchasing power

parity (PPP)

• Resource endowment

• Secondary industrial

sector

• Tertiary industrial

sector

• World Bank

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Comparative Economic Development · 2.1 Defining the Developing World •World Bank Scheme- ranks...

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