Comparative perspective

on developing economies
Team 03
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Registration Number Name

2018MS8001 P. A. Athapaththu

2018MS8027 D. A. Basnayaka

2018MS8058 E. A. N. R. De Silva

2018MS8081 L. D. S. Dinusha

2018MS8401 R. A. T. S. Ratnayake

2018MS8477 Y. N. Tennakoon

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 01. Objectives of the Study

• While using condensed international comparative statistics, evaluating developing economies' current
economic level and growth potential by considering the large statistical errors and biases in
international comparisons.

• Building industrial policies to foster domestic industries towards a viable model that can withstand
international competition.

• Identifying a non-conventional capital formation method.

• Identifying the role of foreign capital import as a support to capital formation in developing economies.

• Identifying the population pressure on natural resources and relationship between population growth
and food supply.
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• Economic Development
Average GDP per capita represents the levels of economic development.

• What is GDP?
An aggregate of goods and services produced within the domestic economy of a nation. It
measures the level of market-based production activities in the domestic economy, which
represents the level of economic welfare enjoyable by the residents from the consumption of
goods and services produced from those activities.

• Issues related with GDP

GDP does not account for people's welfare associated with non-market factors such as conservation of
natural environments, protection of human rights and domestic services provided by family members
within the household. Therefore, appropriability of average GDP per capita to represent the levels of
economic development for the sake of comparisons across countries is questionable.

• Ultimate goal of economic development

Achieve maximum exploitation of the human capability that is latent to all the people in the world but not to increase
the output of market-based production.

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 Limitations of national account statistics across
countries in different stages of economic
development
 Goods and services like yarn spun and cloth woven by a housewife are not included in national income when
consumed at home and sold outside the home
 Theoretically considered capital formation activities, the use of family labor by small peasants to plant trees
and improve pasture are not included in national income
 More subsistence-oriented economies are, the stronger the tendency is for their income levels and
investments to be underestimated relative to market-oriented economies

 Difficult to select the countries that satisfy the objective

criteria of both regional representativeness and
convenience in interregional comparisons
 When convert from local currencies into comparable units,
market exchange rates are supposed to reflect purchasing
power parities with respect to tradable goods alone.
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 02. Economic growth
and structural change
 Summarizes international comparisons on
macroeconomic growth and Comparative analyses were
made with both individual country data and regional
averages.

 ‘Sub-Saharan Africa’ (Africa), 'East Asia' excludes Pacific

countries, 'Latin America' includes Caribbean countries.
Korea refers to the Republic of Korea in the South.
Regional averages for South Asia, Latin America, and
high-income OECD countries are the weighted averages
of all the countries belonging to respective regions. Africa
and East Asia, the weighted averages of sample
countries (Ethiopia, Kenya, Nigeria for Africa, and China,
Indonesia, Thailand, and Korea for East Asia) are used in
order to avoid the effects of including the Republic of
South Africa in Africa and Japan in East Asia to
disproportionately pull up the averages of respective
regions.
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  low-income economies diverge farther above the 45-degree line relative to
horizontal axis high-income ones, reflecting the tendency that the poorer the economies, the
measuring GDP per capita converted by exchange more seriously underestimated their income levels are if GDP per capita
rate (Y) converted by exchange rate is used as a measure.
vertical axis
measuring that converted by PPP (YP)  Correlation coefficient is as high as 0.98 and Spearman's rank correlation is
even higher than 0.99.

 Average GDP per capita of high-income economies increased at the

compound rate of about 2.6 per cent from 1965 to 2000.

 Income gap between high-income economies and the poorest ones has
been widening further.

 The lowest-income group has failed to join 'the club of convergence'

consisting of relatively advanced industrial economies.
Convergence clubs facilitates to examining economic development in a
specific country, relative to other countries. Involves to identify similarities
and differences between countries and assist researchers in making
generalized hypotheses.

 Laggard economies tend to grow faster by closing their productivity gap with
the more advanced through technology borrowing.

 Problem emerge with how appropriate the national account statistics such
as average GDP per capita are to represent the levels of economic
development for the sake of comparisons across countries.

 Required more general welfare measures by incorporating non-economic

factors.
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How to eliminate issues related with GDP?
• Human Development Index (HDI)
• prepared by the United Nations Development Programme (UNDP)

What is Human Development Index (HDI)?

• Statistic composite index which comprises with simple average of three indexes,
1. Life expectancy at birth as a measure of a long and healthy life.
2. The level of education measured as the weighted average of adult literacy rate and the combined primary and tertiary school
enrolment ratio.
3. GDP per capita in PPP conversion as a measure of a standard of consumption and living.
• Each index is so designed as to range from the minimum value of 0 to the maximum value of 1.

It is important to compare data series between HDI and GDP per capita to see if different conclusions might be
implied between the two series. According to broad comparisons among seventeen selected countries,
• Spearman's rank correlation coefficients between HDI and GDP per capita are extremely high (0.96 with both of the two
series of GDPs converted by exchange rates and converted by PPPs). Rank correlations are even higher for all the 85
countries for which HDIs are calculated for 2000 (0.99 with both of the two GDP series).The high correlation between the
HDI and the GDP series is naturally expected, because both life expectancy and educational level are highly correlated with
GDP per capita the use of HDI instead of GDP might affect some conclusions in comparing countries with similar income
levels but such broad comparisons across countries in different development stages are unlikely to be affected to any
significant extent. 8
 • This table shows how the share of GDP
Changes in industrial structure changed from 1965 to 2000 between the
three major sectors of agriculture,
industry, and services.
• In high-income economies, both the
agricultural and industrial sectors have
reduced their share of GDP, signaling a
major expansion of the services sector.

• These changes are in line with Petty

Clark's law. It predicts that the center of
gravity of economic activity will shift from
the primary sector to the secondary sector
and to the tertiary sector as average per
capita income continues to rise.
• The industrialization of these developing
economies was promoted using various
policies, including government subsidies
and credit, while the so-called 'import-
substitution industrialization (ISI)' policy
was generally adopted from the 1950s to
the 1970s.
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• Accordingly, if the local industries were nurtured to a strong level, they
would have to increase their competitiveness in the international market
and as a result the exports of manufactured goods would increase.

• The export share of manufactured goods is higher than the gross domestic
product of the industry and retains the inverse of Latin American countries
rich in natural resources.

• However, in general, as the capital, skilled labor, and management skills

specific to industrial production accumulate in industrialization, the export
share of manufactured goods is expected to increase over time in line with
the increase in the GDP share of the industry. This observation shows the
failure of their industrial safety policies to elevate local industries towards a
viable model that can withstand international competition.

• From the 1970s to the early 1980s, Indonesia and Nigeria experienced oil
booms, and with major unexpected gains in government revenue and
foreign exchange earnings, with which governments implemented
ambitious development plans to promote modern industries such as
petrochemicals.

• East Asia has continued to expand its industrial sector since the 1980s in
line with the increasing competitiveness of its industry as measured by the
UNIDO Index.

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 03. Capital formation and Savings in economic
growth

Capital

Tangible Intangible
capital capital

• In National accounts, only consisted with tangible capital.

• Capital formation/investment is defined as an increase in capital over a period of time.
(It usually takes a year.)
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• Assume that Speed of Capital
accumulation is reflected by
the ratio of Capital
accumulation to GDP.

• Faster increasement in Capital

stock made this ratio larger
especially in East Asia.
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 Positive relationship & correlation
(r = 0.78) between Ratio of Capital
formation to GDP and Real growth
rate of GDP.

Two-way causal relationship

High Savings High Investment Economic growth

Fast income High Investment High Savings

growth Incremental Permanent
income income
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(according to “Permanent income hypothesis”)
Virtuous circle in Asia
High Investment High Economic
Growth

Vicious circle in Africa

Low Investment Low Economic
Growth

Even very poor economies will be able

to achieve high economic growth if they
sufficiently mobilize the large domestic
savings to Capital formulation

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 External debt and inflation

Domestic saving
Domestic capital
formation
Foreign capital import

Net capital import = domestic investment – domestic saving

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• following graph represent the net
capital import as measured by the
I-S gap relative to per capital GDP
for the period of 1965-1980 and
1981-2000 each selected
countries.

• There is an invers relationship

found between two variables.

• Graph shows positive and

negative capital import variation in
each country during this two
specific time periods.

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• How capital import different between two economies?
• Poorer countries more heavily they rely on capital import for financing their capital formation.
• High income economies characterized by large saving related to domestic investment opportunity to low-income
economies with high investment opportunities relative to their saving capacity.

• What is the major role of capital import?

• The role of foreign capital import as a support to capital formation in developing economies is quite significance.

• How capital import become inefficiency ?

• Sometimes capital imports may lead to insolvency at national level. because, that the borrowing country will
become unable to meet debt-service obligations including interest payment and principal repayment.

• For example – Nigeria's net capital import turning from positive in

1965-80 to negative in 1981-2000 as observed above graph.

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• In theory term,
• Development economies to rely on external credit to finance their domestic investment.
• If borrowed fund utilized effectively would contribute to reduction import and expansion on export
• If the external debt could be paid back by foreign exchange thus saved or earned, no serious
accumulation of external debt would arise.

• How arise inflationary pressure with capital import?

• If the net capital import from abroad fails to close the domestic I-S gap, the different work as an
inflationary pressure.
• Government try to avoided inflationary pressure by undertake fiscal and financial policies to curb
effective demand.
• Finance excess investment by means of printing money, it also leads to higher rate of inflation.
• Inflation does not necessarily cause harm real economic growth so long as its speed in moderate
and stable.

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• However, under hyper inflation period who are induced to use available funds for short-run
speculation rather than long term investment, causing a serious negative effect on their
economic growth.

• Furthermore, as the rate of inflation rises, the risk increases for foreign investors of
incurring loss from devaluation of local currency. This should result in a reduction in
foreign capital flow, and, thereby, increase the need for government to printing money.

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04. Accumulation of Human Capital

for enhancing the ability of

Conventional capital human begins and human
formation capabilities

Non-conventional capital Investment in

formation human capital

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Measurement of Human Capital

• Direct measures of human capital and its formation are not available for
international comparison over a wide range of countries.
• Cross-country comparison is based on two proxies which are
considered to reflect the level of human capital accumulation.

1. Average number of years of schooling per person at ages 25 and higher

prepared by Robert J. Barro and Jong-Wha Lee (2000).
2. Average life expectancy at birth, or average number of years from birth to death.

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 2 Proxies

Average Average life

schooling expectancy

Formal Health
Education condition
of the country of the country
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• In 1965-2000 time period, African, South
Asian, East Asian, Latin American and
high-income countries like France, UK,
USA and Japan have shown an increase in
their average schooling and average life
expectancy.

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Correlation of proxies with per capita GDP
(Cross-sectional)

Positive correlation
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Correlation of proxies with per capita GDP
(Time-series)

Positive correlation
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 Major dilemma faced by low-income economies

• As they are so poor, their future discount rates must be very high.
• If returns to investment in education are so low in the short run, is it appropriate to allocate a large
share of affordable investment to education?
• Unless education is strengthened to a sufficient level for borrowing advanced foreign technology.

Don’t
Invest
Invest

Cannot be acquired
Return is low in short
advance foreign
run
technologies
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 05. Population, Natural Resources and
Foods

• Production activities by human beings are activities of processing

natural resources with the application of labor and capital.

• progress in civilization has been the process of substituting man-made

capital for natural resources under the pressures of population growth.

• That substitution has been facilitated by technological and institutional

innovations.

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Population
Pressure on
Natural Resources

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• The average number of persons per square kilometer of surface area in a nation's territory used as a rude proxy
for relative scarcity of natural resources.

• Territorial land area is such a poor proxy for natural resource endowments which consist not only of physical area
but also of many factors, including soil fertility, rainfall, mineral deposits, etc.

• Can be argued that endowments of natural resources represent an overriding constraint on economic growth.
Ex:- Japan with much poorer natural resources endowments than the USA was able to reach about the same per
capita income level as the USA.

• In history, some economies were able to achieve a high-income level through exploitation of natural resources,
but their growth was temporary and not sustainable if they continued to rely solely on natural resource
exploitation.

• The columns 2 and 3 reveals the tendency towards faster population growth in low-income economies.

• Some Asian economies were successful in significantly curtailing population growth rates from the 1965-80 to the
1980-2000 period.
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Population growth vs. food supply
• Increased population pressure on natural resources, which may make low-income economies unsustainable.
• Traditionally, developing economies have responded to population growth by opening new lands for cultivation.
Yet, expansion in agricultural land area has failed to keep up with rapid population growth.
Ex :- in Africa, the average population growth rate for 1965-2000 was nearly 3% per year while agricultural
land increased at less than 1 %, which result that agricultural land endowment per capita decreased at the rate of
more than 2% per year
• Decreases in per capita food production in Africa indicate a failure to compensate for the negative effects of
decreases in per capita endowments in natural resources.
• That failure was not the inevitable consequence of high population growth.
Ex:- low-income economies in Asia, such as India and Pakistan, were able to achieve significant increases in
food production per capita despite decreases in agricultural land area per capita at magnitudes comparable with
Africa.
• In low-income economies in which the agricultural sector has a dominant weight, stagnation in agricultural
production as expressed by decreases in per capita food production has a major adverse effect on overall
economic development.
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International comparison of the average annual growth rates of per capita GDP
from 1965 to 2000 and percentage increases in food production per capita from
1965 to 2000

The significantly positive correlation seems to

indicate that it is necessary for low-income
economies to overcome the constraint of land
resources on food production by raising
agricultural productivity in the process of
industrialization.

Positive correlation was significant across

developing economies but not visible within the
group of high-income economies.

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THANK YOU

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