Lecture 2 Comparative Economic Development Copyright © 2009 Pearson Addison-Wesley. All rights...

Lecture 2

Comparative Economic Development

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-1


Common Characteristics of developing 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.


Defining the Developing World

• World Bank Scheme- ranks countries on GNP/capita– LIC ($975 or less)

– LMC (between $976 and $3855)

– UMC (between $3856 and $11906)

– High income countries – OECD- Organisation for Economic Co-operation and Development ($11907 or more)


Table 2.1 Classification of Economies by Region and Income, 2007


Table 2.1 Classification of Economies by Region and Income, 2007 (continued)

(Latin America and the Caribbean) (Sub-Saharan Africa)


Table 2.1 Classification of Economies by Region and Income, 2007 (continued)


Figure 2.1 Nations of the World, Classified by GNI Per Capita


Measuring Development for Quantitative Comparison across Countries

• Gross National Income (GNI)

• Gross Domestic Product (GDP)

• PPP (Purchasing Power Parity – Calculation of GNI using a common set of international price for all goods and services, to provide more accurate comparisons of living standards) method instead of exchange rates as conversion factors (see figure 2.2)


Figure 2.2 Income Per Capita in Selected Countries


Table 2.2 A Comparison of Per Capita GNI, 2005


Some Basic Indicators of Development

• Health

• Life Expectancy

• Education

• HDI as a holistic measure of living levels– HDI also varies for groups within countries

– HDI also varies by region in a country

– HDI also reflects rural-urban differences


Table 2.3 Commonality and Diversity: Some Basic Indicators

Holistic Measures of Living Levels and Capabilities

The Traditional Human Development Index


Origin of HDI:

• The index was developed in 1990 by Pakistani economist Mahbub ul Haq and Sir Richard Jolly, with help from Gustav Ranis of Yale University and Lord Meghnad Desai of the London School of Economics

Dimensions of HDI

• Life expectancy at birth, as an index of population health and longevity

• Knowledge and education, as measured by the adult literacy rate (with two-thirds weighting) and the combined primary, secondary, and tertiary gross enrollment ratio (with one-third weighting)

• Standard of living, as measured by the natural logarithm

of gross domestic product (GDP) per capita at purchasing power parity (PPP) in United States dollars.

Calculation of HDI

To construct the index, fixed minimum and maximum values have been established for each of these indicators:

• Life expectancy at birth: 25 years and 85 years

• Adult literacy rate: 0 & 100 %

• Combined gross enrolment ratio: 0% & 100 %

• Real GDP per capita (PPP$): $100 & $40,000 (PPP$)

Calculation of HDI

• Individual indices can be computed according to the general formula:

• Index = Actual xi value – minimum xi value/

Maximum xi value – minimum xi value

For eg: the life expectancy at birth in a country is 63.7 years the index of life expectancy for the country would be:

Life expectancy index = 63.7-25/85-25 = 40/60 = 0.645

Calculation of HDI

• The adult literacy rate is 61.0%.

Adult literacy index =61.0-0/100-0=0.61

• Combined gross enrolment ratio is 63.8%

Combined gross enrolment index

=63.8-0/100-0=0.638

• Education index=2/3(0.61)+1/3(0.638)=0.62

Real GDP is 3452,then adjusted GDP

=log(3452)-log(100)/log(40000)-log(100)=0.591

• Therefore HDI = (0.645+0.62+0.591)/3 =0.619

Categories of HDI:

• Very High Human Development Index – HDI 0.900 to 1.0

• High Human Development Index – HDI 0.800 to 0.900

• Medium Human Development Index – HDI 0.500 to 0.799

• Low Human Development Index – HDI below 0.500

Relationship between individual development and human development in general

• If two people in a relatively unequal society have an HDI of 0.5 and 0.25, respectively, and both increase their level of development by 0.25, they will affect general development in the same magnitude.

• In a more equal society, however, an increase

in the HDI of the poorer person should count more.

Limitations of HDI:

Not a comprehensive measure of human development. It only focuses on three dimensions of capabilities.

The HDI is not designed to assess progress in human development over a short-term period because two of its component indicators—adult literacy and life expectancy at birth—are not responsive to short-term policy changes.

Like any average country measure, the HDI does not account for variations in human development within the country.

Countries with the same HDI may be very different in how human development is distributed, either from region to region, or from social group to social group.


Figure 2.3 Human Development Disparities within Selected Countries


Figure 2.3 Human Development Disparities within Selected Countries (continued)


Table 2.4 Human Development for 23 Selected Countries (2004 Data)


Table 2.4 Human Development for 23 Selected Countries (2004 Data) (continued)


Table 2.5 Human Development Index Variations for Similar Incomes (2004 Data)

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Lecture 2 Comparative Economic Development Copyright © 2009 Pearson Addison-Wesley. All rights...

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