M02 TodaroSmith013934 11 Econ C02

Chapter 2
Comparative
Economic
Development
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Common characteristics of developing countries
• These features in common are on average and with great

diversity, in comparison with developed 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.

2-2
2.1 Defining the Developing World
• World Bank Scheme- ranks countries on

GNP/capita
– LIC---Low-income countries ($935 or less)
– LMC---Lower-middle-income countries ($936–
$3,705)
– UMC---Upper-middle-income countries
($3,706–$11,455)
– OECD---High-income countries ($11,456 or
more)

2-3
Table 2.1 Classification of Economies by Region and
Income, 2010

2-4
Table 2.1 Classification of Economies by Region and Income,
2010 (continued)

2-5
Table 2.1 Classification of Economies by Region and Income,
2010 (continued)

2-6
Figure 2.1 Nations of the World, Classified
by GNI Per Capita
Source: Data from Atlas of Global Development, 2nd ed., pp. 10–11. © Collins Bartholomew
Ltd., 2010.

2-7
2.2 Basic Indicators of Development: Real
Income, Health, and Education
• Gross National Income (GNI): The total domestic and foreign
output claimed by residents of a country, consisting of gross
domestic product (GDP) plus factor incomes earned by foreign
residents, minus income earned in the domestic economy by
non residents.
• Gross Domestic Product (GDP): The total final output of goods
and services produced by the country’s economy within the
country’s territory by residents and nonresidents, regardless of
its allocation between domestic and foreign claims.
• Purchasing Power Parity (PPP): 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.

2-8
Figure 2.2 Income Per Capita in Selected Countries
(2008)

2-9
Table 2.2 A Comparison of Per Capita GNI, 2008

2-10
2.3 Holistic Measures of Living Levels and
Capabilities
• Health is indicated by life expectancy, the rate of undernourishment,
the under-5 mortality rate, and the crude birth rate.
• 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.
• Crude birth rate: The number of children born alive each year per
1,000 population.
• Under-5 mortality rate: Deaths among children between birth and 5
years of age per 1,000 live births.
• Fertility rate, total Number of children that would be born to each
woman if she were to live to the end of her child-bearing years and
bear children at each age in accordance with prevailing age-specific
fertility rates.

2-11
2.3 Holistic Measures of Living
Levels and Capabilities
• Education is indicated by literacy rate, average years of schooling, enrollment
rate, expected years of schooling.
• Literacy rate, adult: Percentage of people ages 15 and older who can, with
understanding, both read and write a short simple statement on their everyday
life.
• Enrolment ratio, gross: Total enrolment in a given level of education, regardless
of age, expressed as a percentage of the official school age population for the
same level of education.
• Enrolment ratio, net: Enrolment in a given level of education of the official age
for that level, expressed as a percentage of the total population of the same age
group.
• Expected years of schooling: Number of years of schooling that a child of school
entrance age can expect to receive if prevailing patterns of age-specific
enrolment rates were to stay the same throughout the child’s life.
• Average/Mean Years of Schooling: Average number of years of education
received by people ages 25 and older in their lifetime based on education
attainment levels of the population converted into years of schooling based on
theoretical durations of each level of education attended.

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2.3 Holistic Measures of Living
Levels and Capabilities
• Human Development Index (HDI): 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.
• 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).

2-13
• HDI can be calculated for groups and regions in a country
– HDI varies among groups within countries
– HDI varies across regions in a country
– HDI varies between rural and urban areas

2-14
Table 2.3 Commonality and Diversity: Some
Basic Indicators

2-15
Figure 2.3 Human Development Disparities within
Selected Countries

2-16
Figure 2.3 Human Development Disparities within
Selected Countries (continued)

2-17
Table 2.4 2009 Human Development Index
for 24 Selected Countries (2007 Data)

2-18
Table 2.5 2009 Human Development Index
Variations for Similar Incomes (2007 Data)

2-19
2.3 Holistic Measures of Living Levels and
Capabilities
• The New Human Development Index

• Introduced by UNDP in November 2010

2-20
What is new in the New HDI?
2. Other key changes:
• Gross national income per capita replaces gross domestic

product per capita
• Revised education components: now using the average
actual educational attainment of the whole population, and
the expected attainment of today’s children
• The maximum values in each dimension have been
increased to the observed maximum rather than given a
predefined cutoff
• The lower goalpost for income has been reduced due to new
evidence on lower possible income levels

2-21
Table 2.6
The 2010
New Human
Development
Index
(NHDI), 2008
Data

2-22
2.4 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

2-23
Figure 2.4 Shares of Global Income, 2008

2-24
Table 2.7 The 12 Most and Least Populated Countries
and Their Per Capita Income, 2008

2-25
Figure 2.5 Under-5 Mortality Rates, 1990 and 2005

2-26
Table 2.8 Primary School Enrollment and Pupil-
Teacher Ratios, 2010

2-27
Figure 2.6 Correlation between Under-5 Mortality
and Mother’s Education

2-28
Figure 2.7 Number of People Living in
Poverty by Region, 1981–2005

2-29
Table 2.9 Crude Birth Rates Around the
World, 2009

2-30
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
– Land Locked Countries

2-31
Table 2.10 The Urban Population in Developed
Countries and Developing Regions

2-32
Table 2.11 Share of the Population Employed in the
Industrial Sector in Selected Countries, 2004-2008
(%)

2-33
9. Underdeveloped Financial and Other

markets
– Imperfect markets
– Incomplete information
10. Colonial Legacy and External
Dependence
– Institutions
– Private property
– Personal taxation
– Taxes in cash rather than in kind
2-34
2.5 How Low-Income Countries Today Differ
from Developed Countries in Their Earlier Stages
• Eight differences
1. Physical and human resource endowments:
 Paul Romer argues that today’s developing nations “are poor
because their citizens do not have access to the ideas that are
used in industrial nations to generate economic value.” 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.
 This idea gap, and what Thomas Homer-Dixon calls the
ingenuity gap (the ability to apply innovative ideas to solve
practical social and technical problems), between rich and poor
nations lies at the core of the development divide. No such human
resource gaps existed for the now developed countries on the eve
of their industrialization.
2-35
2. Per capita incomes and levels of GDP in relation to
the rest of the world:
 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.
 Obviously, the average standard of living in, say, early-nineteenth-
century England was nothing to envy or boast about, but it was not
as economically debilitating or precarious as it is today for a large
fraction of people in the 40 or so least developed countries, the
people now often referred to as the “bottom billion.”
 At the beginning of their modern growth era, today’s
developed nations were economically in advance of the rest
of the world. By contrast, today’s developing countries
began their growth process at the low end of the
international per capita income scale.

2-36
3. Climate:
 Almost all developing countries are situated in tropical or
subtropical climatic zones.
 It has been observed that the economically most successful
countries are located in the temperate zone.

2-37
4. Population size, distribution, and 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.
 By contrast, 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.
 Moreover, the concentration of these large and growing 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.

2-38
5. Historic role of international migration:
 In the nineteenth and early twentieth centuries, a major outlet for
excess rural populations was international migration, which was
both widespread and large-scale. More than 60 million people
migrated to the Americas between 1850 and 1914, a time when
world population averaged less than a quarter of its current levels.
 In Brinley Thomas’s famous description, the “three outstanding
contributions of European labor to the American economy—
1,187,000 Irish and 919,000 Germans between 1847 and 1855,
418,000 Scandinavians and 1,045,000 Germans between 1880 and
1885, and 1,754,000 Italians between 1898 and 1907.
 Why the large numbers of impoverished peoples in Africa, Asia, and
Latin America do not follow the example of workers from
southeastern Europe and seek temporary or permanent jobs in
areas of labor shortage?
 Brain Drain, Brain Gain, Remittances
2-39
6. International trade benefits:
 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.
 Rapidly expanding export markets provided an additional stimulus
to growing local demands that led to the establishment of large-
scale manufacturing industries.
 In the nineteenth century, European and North American countries
were able to participate in this dynamic growth of international
exchange largely on the basis of relatively free trade, free capital
movements, and the unfettered international migration of unskilled
surplus labor.
 In the twentieth century, the situation for many developing
countries was very different.
 Balance of Payment and Terms of Trade Problems to the
Developing
Copyright Countries
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2-40
7. Basic scientific/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.

2-41
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.
 The developed countries also typically enjoyed relatively stronger
political stability and more flexible social institutions with broader
access to mobility.
 In contrast, particularly in Africa, national boundaries were more
arbitrarily dictated by colonial powers. The “failed state,” and states
in danger of becoming so, is a phenomenon of the postcolonial
period, with roots in imperial and colonial practices.
2-42
2.6 Are Living Standards of Developing
and Developed Nations Converging?
• If the growth experience of developing and developed countries

were similar, there are two important reasons to expect that
developing countries would be “catching up” by growing faster on
average than developed countries.
 The first reason is due to technology transfer. Today’s developing
countries do not have to “reinvent the wheel”; for example, they
do not have to use vacuum tubes before they can use
semiconductors.
 This is known as an “advantage of backwardness,” a term coined
by economic historian Alexander Gerschenkron.
 For example, Britain doubled its output per person in the first 60
years of its industrial development, and the United States did so in
45 years. South Korea once doubled per capita output in less than
12 years and China has done so in less than nine.

2-43
 The second reason to expect convergence if conditions are similar is
based on factor accumulation. Today’s developed countries have high
levels of physical and human capital; in a production function analysis,
this would explain their high levels of output per person.
 But in traditional neoclassical analysis, the marginal product of capital
and the profitability of investments would be lower in developed
countries where capital intensity is higher, provided that the law of
diminishing returns applies.
 Given one or both of these conditions, technology transfer and more
rapid capital accumulation, incomes would tend toward convergence in
the long run as the faster-growing developing countries would be
catching up with the slower-growing developed countries.
 Whether there is now convergence in the world economy depends on
two levels of how the question is framed: whether across average
country incomes or across individuals (considering the world as if it
were one country); and whether focusing on relative gaps or absolute
gaps.

2-44
• Relative Country Convergence The most widely used
approach is simply to examine whether poorer countries are
growing faster than richer countries. As long as this is happening,
poor countries would be on a path to eventually “catch up” to the
income levels of rich countries.
 Although China’s average income was just 3% of that of the United
States in 1980, it was estimated to have reached 14% of U.S.
income by 2007.
 But in the same period, the income of the Dem. Rep. of Congo fell
from about 5% of U.S. levels to just 1%.
 But globally, evidence for relative convergence is weak at best,
even for the most recent decades.

2-45
• Absolute Country Convergence With the recent rapid growth
in China, and the acceleration of growth in South Asia as well,
these regions are currently on a path of relative country
convergence.
 For example, in the 1990–2003 period, while income grew 24% in
high-income OECD countries, it grew 56% in South Asia and 196%
in China. But due to their relatively low starting income levels,
despite higher growth, income gains were still smaller in absolute
amount than in the OECD, as illustrated in Figure 2.9.
 That is, even when the average income of a developing country is
becoming a larger fraction of developed country average incomes,
the difference in incomes can still continue to widen for some time
before they finally begin to shrink.

2-46
Figure 2.8 Relative Country Convergence: World,
Developing Countries, and OECD

2-47
Figure 2.8 Relative Country Convergence: World,
Developing Countries, and OECD (cont’d)

2-48
Figure 2.9 Growth Convergence versus Absolute
Income Convergence

2-49
Figure 2.10 Country Size, Initial Income
Level, and Economic Growth

2-50
2.7 Long-Run Causes of Comparative
Development
• Schematic Representation
– Geography: Malaria, Landlocked,
• Institutional quality (defined by Nobel laureate Douglass North as the “rules of the
game” of economic life)- Geography and Institutions as explained by Acemoglu et
al., High Mortality rates/high population density/more efforts required to exploit as
worse geography Extractive Institutions steal fast and get out favor
extraction over production…. colonial and post-colonial
– Colonial legacy- pre colonial comparative advantage
– Evolution and timing of European development
– Inequality- human capital
– Type of colonial regime

2-51
Figure 2.11 Schematic Representation of Leading
Theories of Comparative Development

2-52
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

2-53
Role of Institutions
• Acemoglu, Johnson, and Robinson’s “reversal of fortune” and extractive

institutions:
• When local populations were larger and denser and social organization was more
advanced, it was easier for colonists to take over existing social structures to gain
tribute. In such cases, resulting institutional arrangements would tend to favor
mechanisms of extraction of existing wealth over the creation of new wealth, often
leading to declines in the relative fortunes of these regions. This is pointed up by
Acemoglu, Johnson, and Robinson, whose influential research on this historical
“reversal of fortune”
• Bannerjee and Iyer, “property rights institutions.” Landlords versus
cultivators

2-54
Concepts for Review
• Absolute poverty • Economic Institutions

• Brain drain • Fractionalization
• Capital stock • Free trade
• Convergence
• Gross domestic product
• Crude birth rate
(GDP)
• Dependency burden
• Depreciation (of the capital • Gross national income
stock) (GNI)
• Diminishing Marginal Utility • Human capital
• Divergence • Human Development Index
(HDI)

2-55
Concepts for Review (cont’d)
• Imperfect market • Purchasing power parity

• Incomplete information (PPP)
• Infrastructure • Research and development
• Least developed countries (R&D)
• Low-income countries • Resource endowment
(LICs) • Terms of trade
• Middle-income countries • Value added
• Newly industrializing • World Bank
countries (NICs)

2-56

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Chapter 2

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• These features in common are on average and with great

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

• World Bank Scheme- ranks countries on

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

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• Using these three measures of development and applying a formula

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– HDI varies among groups within countries

– HDI varies across regions in a country

– HDI varies between rural and urban areas

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• The New Human Development Index

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• Gross national income per capita replaces gross domestic

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1. Lower levels of living and productivity

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5. Greater Social Fractionalization

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9. Underdeveloped Financial and Other

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• If the growth experience of developing and developed countries

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