Development Economics

Comparative Economic Development

In this lesson we will discuss the following:
● We introduce the study of comparative economic development.
● Define the developing world
● Describe how development is measured so as to allow for quantitative
comparisons across countries.
● examine basic indicators of three facets of development: real income per
capita adjusted for purchasing power; health as measured by life
expectancy, undernourishment, and child mortality; and educational
attainments as measured by literacy and schooling.
Defining the developing world
 1. Lower levels of living and productivity
2. Lower levels of human capital

10 features
3. Higher levels of inequality and absolute
poverty
4. Higher population growth rates

developing
5. Greater social fractionalization
6. Larger rural populations but rapid rural-
to-urban migration

countries have in
7. Lower levels of industrialization
8. Adverse geography
9. Underdeveloped financial and other

common markets
10. Lingering colonial impacts such as poor
institutions and often external dependence.
How do we define 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.
Definition of terms
● World Bank -An organization known as an “international financial institution” that provides development funds to
developing countries in the form of interest-bearing loans, grants, and technical assistance.
● Low-income countries (LICs) In the World Bank classification, countries with a gross national income per capita
of less than $976 in 2008. (less than 45,ooo.00 Php/month)
● Middle-income countries In the World Bank classification, countries with a GNI per capita between $976 and
$11,906 in 2008. (45,000.00 Php - 577,000.00 Php/month)
● 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 United Nations designation of countries with low income, low human capital, and
high economic vulnerability.
World Bank: Classifications
210 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.

(Often, LMCs and UMCs are informally grouped as the middle-income countries.)
World Bank: Classifications
Developing countries are usually classified on countries belonging to:

● LICs
● LMCs
● UMCs

Basically, those in
red and yellow are
considered as
Developing Countries
World Bank: Classifications
special distinction is made among upper-middle-income or newly high-income economies, designating some
that have achieved relatively advanced manufacturing sectors as newly industrializing countries (NICs). Yet
another way to classify the nations
of the developing world is through
their degree of international
indebtedness; the World Bank has
classified countries as:

● severely indebted,
● moderately indebted,
● and less indebted.
World Bank: Classifications
Another widely used classification is that of the least developed countries, a United Nations designation that as
of 2018 included 47 countries (see image). For inclusion, a country has to meet each of three criteria:

● low income,
● low human capital,
● and high economic
vulnerability
https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/Snapshots2018.pdf
Basic Indicators of Development
Power Purchasing Parity PPP

Taken from: https://www.thebalance.com/purchasing-power-parity-3305953

Power Purchasing 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.

GNI = GDP + (inflow of income by overseas residents - outflow of income made in the domestic
economy by non-residents)

We usually compute the performance of an economy based on their GNI but it did non really show the
ideal picture especially for the developing countries. Basing the GNI of a country computing of the
exchange rate in dollars would exaggerate the GNI values between developed and developing countries.
e.g.:
In 2008 Norway had 312 times the per capita income of Ethiopia and 84 times that of India.
Power Purchasing Parity
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)

e.g. :

Standard Brandy (Emperador) 750ml in the Ph costs 150php - around 3 USD meanwhile in U.S. The cheapest
brandy costs around twice the amount (6 USD)

Or comparing a Mcdo Cheese burger price in the Ph and US.

instead of exchange rates as conversion factors. PPP is calculated using a common set of international prices for all goods
and services. In a simple version, purchasing power parity is defined as the number of units of a foreign country’s
currency required to purchase the identical quantity of goods and services in the local developing country market as $1
would buy in the United States.

https://www.wine-searcher.com/grape-2030-brandy?tab_F=cheapest
 Indicators of Health and Education

https://creativebonito.com/wp-content/uploads/2019/07/learning-education-illustration-concept-templates-cover.png
 Indicators of Health and Education
Besides average incomes, it is necessary to evaluate a nation’s average health and educational
attainments, which reflect core capabilities.

● HEALTH
○ Life expectancy, the rate of undernourishment, the under-5 mortality rate, and the
crude birth rate
● EDUCATION
○ Literacy rate, male and female adult literacy

https://creativebonito.com/wp-content/uploads/2019/07/learning-education-illustration-concept-templates-cover.png
 Indicators of Health and Education
● HEALTH
○ Life expectancy is the average number of years newborn children would live if subjected to
the mortality risks prevailing for their cohort at the time of their birth.
○ Undernourishment means consuming too little food to maintain normal levels of activity; it
is what is often called the problem of hunger.
○ High fertility can be both a cause and a consequence of underdevelopment, so the birth rate
is reported as another basic indicator.
● EDUCATION
○ Literacy is the fraction of adult males and females reported or estimated to have basic
abilities to read and write; functional literacy is generally lower than the reported numbers.

https://creativebonito.com/wp-content/uploads/2019/07/learning-education-illustration-concept-templates-cover.png
https://ourworldindata.org/grapher/human-development-index?time=2017
Human Development Index
The HDI attempts to rank all countries on a scale of 0 (lowest human
development) to 1 (highest human development) based on three goals or end
products of development:

● longevity as measured by life expectancy at birth,

● knowledge as measured by a weighted average of adult literacy (two-thirds) and gross
school enrollment ratio (one-third),
● and standard of living as measured by real per capita gross domestic product
adjusted for the differing purchasing power parity of each country’s currency to
reflect cost of living and for the assumption of diminishing marginal utility of income.
HDI Score
Using these three measures of development and applying a formula to data for
177 countries, the HDI ranks countries into four groups:

● low human development (0.0 to 0.499),

● medium human development (0.50 to 0.799),
● high human development (0.80 to 0.90),
● and very high human development (0.90 to 1.0).

See an interactive sample here: https://ourworldindata.org/grapher/human-development-index?time=2017

10 features developing countries have in common
Breakdown
Comparative analysis on the
development LICs to
Developed Countries
Comparative Development
The position of developing countries today is in many important ways
significantly different from that of the currently developed countries when they
embarked on their era of modern economic growth. We can identify eight
significant differences in initial conditions that require a special analysis of the
growth prospects and requirements of modern economic development
 1. Physical and human resource
endowments

8 significant 2. Per capita incomes and levels of GDP in

relation to the rest of the world
differences in initial conditions 3. Climate
4. Population size, distribution, and
that require a special analysis of
growth
the growth prospects and 5. Historical role of international
requirements of modern migration
economic development: 6. International trade benefits
7. Basic scientific and technological
research and development capabilities
8. Efficacy of domestic institutions
1. Physical and human resource endowments
Contemporary developing countries are often less well endowed with natural
resources than the currently developed nations were at the time when the latter
nations began their modern growth. Some developing nations are blessed with
abundant supplies of petroleum, minerals, and raw materials for which world
demand is growing; most less developed countries, however—especially in Asia,
where more than half of the world’s population resides—are poorly endowed
with natural resources.
Physical and human resource endowments
Moreover, in parts of Africa, where natural
resources are more plentiful, and geologists
anticipate that there is far more yet to be
discovered, heavy investments of capital are
needed to exploit them, which until very
recently has been strongly inhibited by
domestic conflict and perhaps Western
attitudes. A new wave of investments from
China and other “nontraditional investors”
has begun to change the picture, though
critics are raising concerns about the process.
Physical and human resource endowments
For Romer, the technology gap between rich and poor nations can be divided
into two components, a physical object gap, involving factories, roads, and
modern machinery, and an idea gap, including knowledge about marketing,
distribution, inventory control, transactions processing, and worker motivation.

Ingenuity Gap - Coined by Thomas Homer-Dixon the ability to apply innovative

ideas to solve practical social and technical problems
2. Relative Levels of Per Capita Income and GDP
The people living in low-income countries have, on average, a lower level of real per
capita income than their developed-country counterparts had in the nineteenth
century

1. 40% of the population of developing countries is attempting to subsist at bare

minimum levels
2. today’s developed nations were economically advance of the rest of the
world
3. Climatic Differences
● Almost all developing countries are situated in tropical or subtropical climatic zones
● economically most successful countries are located in the temperate zone
● heat and humidity in most poor countries contribute to deteriorating soil quality and the
rapid depreciation of many natural goods
● They also contribute to the low productivity of certain crops, the weakened regenerative
growth of forests, and the poor health of animals
● Extremes of heat and humidity can also weaken their health, reduce their desire to engage
in strenuous physical work, and generally lower their levels of productivity and efficiency
(Malaria and Dengue fever being common in hot and humid areas)
4. Population Size, Distribution, and Growth
GROWTH
Before and during their early growth years,
Western nations experienced a very slow rise
in population growth. As industrialization
proceeded, population growth rates increased
primarily as a result of falling death rates but
also because of slowly rising birth rates.
However, at no time did European and North
American countries have natural population
growth rates in excess of 2% per annum, and
they generally averaged much less.
DISTRIBUTION
the populations of many developing countries
have been increasing at annual rates in excess
of 2.5% in recent decades, and some are still
rising that fast today
The concentration of populations in a few areas
means that many developing countries have
considerably higher person-to-land ratios than
the European countries did in their early
growth years
Population Size, Distribution, and Growth
SIZE

● No country that embarked on a long-term period of economic growth

approached the present-day population size of India, Egypt, Pakistan,
Indonesia, Nigeria, or Brazil.
● Nor were their rates of natural increase anything like that of present-day
Kenya, the Philippines, Bangladesh, Malawi, or Guatemala.
5. The Historical Role of International Migration
Many of the people who migrate from poor to richer
lands are the very ones that developing countries can
least afford to lose: the highly educated and skilled.
Since the great majority of these migrants move on a
permanent basis, this perverse brain drain not only
represents a loss of valuable human resources but
could also prove to be a serious constraint on the
future economic progress of developing nations.

Example: Filipino Nurses migrating to developed

countries
6. The Growth Stimulus of International Trade
● International free trade has been called the “engine of growth”
that propelled the development of today’s economically
advanced nations during the nineteenth and early twentieth
centuries.
● In the twentieth century, the situation for many developing
countries was very different.
● Their exports expanded, but usually not as fast as the exports of
developed nations.
● Their terms of trade declined over several decades.
The Growth Stimulus of International Trade
● Where developing countries are successful at becoming lower-cost producers of
competitive products with the developed countries (e.g., textiles, clothing, shoes,
some light manufactures),
● the latter have often resorted to various forms of tariff and nontariff barriers to
trade, including “voluntary” import quotas, excessive sanitary requirements,
intellectual property claims, antidumping “investigations,” and special licensing
arrangements.
7. Basic Scientific and Technological Research and Development
Capabilities
● In the important area of scientific and technological research, low-income developing
nations in particular are in an extremely disadvantageous position vis-à-vis the
developed nations.

● In contrast, when the latter countries were embarking on their early growth process,
they were scientifically and technologically greatly in advance of the rest of the world.

● They could consequently focus on staying ahead by designing and developing new
technology at a pace dictated by their long-term economic growth requirements
8. Efficacy of Domestic Institutions
Another difference between most developing countries and most developed countries at the time
of their early stages of economic development lies in the efficacy of domestic economic, political,
and social institutions.

● By the time of their early industrialization, many developed countries, notably the
United Kingdom, the United States, and Canada, had economic rules in place that
provided relatively broad access to opportunity for individuals with entrepreneurial
drive.
● Today such extraction may be carried out by powerful local interests as well as foreign
ones.
● But it is very difficult to change institutions rapidly.