Development Economics

GS F234
Leela Rani, PhD
Associate Professor, Management
BITS Pilani Email: leela_r@pilani.bits-pilani.ac.in
Pilani Campus
 BITS Pilani
Pilani|Dubai|Goa|Hyderabad

Managerial Economics
Chap 02: Perspective on Developing Economies
A Comparative Perspective On Developing Economies

1. The Aim Is To Take A Bird's Eye View Of Developing Economies Current Level And Growth Potential
2. Using International Comparative Statistics
3. Text Book Focuses On Statistics Till Year 2002
4. However The Perspective Is Important

5. The comparison is made only for select countries(17)  from four regions:
Þ Africa,  South Asia,  East Asia,  Latin America, and OECD

1. A major problem in comparing National incomes is to choose between:

2. Methods for conversion of GDP from local currency to comparable units
3. One can use current exchange rates (or base year exchange rate)
4. For GDP can be converted using purchasing power parity –PPP ( base year chosen) 

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Major Problems Experienced In  Using International Comparative  Statistics

Given that different countries are at different stages of economic development

In conventional national accounting:
=> Goods and services produced in households  are not counted in GDP
 => Even when they are sold out,  a large part can form the informal sector and not counted in
GDP

This underestimates the GDP especially in developing countries

The same is true for subsistence-oriented economics
Also, data collection is A costly process
This adversely affects data collection in developing countries
(However today with it it is easier)

WORLD DEVELOPMENT INDICATORS  generate 500 statistical series  for almost 200 countries

Few used in this chapter are:  GDP,  GDP per capita, HDI, changes in industrial structure, the
share of exports,   competitive industrial performance or CID,   savings,  external debt and inflation
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Use of forex rate vs. PPP (purchasing power parity)

1. Market exchange rate ( captured by forex rates) actually reflect PPP only with respect to tradable
goods. 
2. A large part of GDP is made of non tradable goods and services or transactions in real properties,  
3. Their prices are relatively low.  
4. This underestimates the purchasing power and therefore consumption of people  -  specially where non
tradable part is large (subsistence economies)
5. For example per capita GDP in Ethiopia in exchange rate conversion was US 99 $,  which was almost
1/300th of  that in USA.  
In PPP conversion,  Ethiopia's GDP per capita is valued as much  as us $ 770.   Or about 1/45th of USA. 

Reading assign (RA):  figure 2.1 

6. While the correlation between these two measures can be as high as 0.98 ( highest value being one), 
Spearman's rank correlation, it can show large discrepancies as in case of Ethiopia. 
7. However income gap between developed and developing countries remains wide.
8. What is also possible is some economies grow at a compounded rate of 2.6 % while others only at 0.4% per
year!.............the LIEs (low income economies) catching up with HIEs is called convergence
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
https://ourworldindata.org/economic-growth#the-world-economy-over-the-last-two-millennia
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 Do economies sustain their growth?
1. Korea,  prior to 1960,  was clubbed with one of the poorest Nations along with sub-saharan Africa and South
Asian countries. 
2. Between 1965 and 2000,  Korea maintained a consistent growth rate of 6% per annum
3. Despite the fact that it was bad hit by 1997 financial crisis
4. In 1995 it joined OECD
5.
6. This is largely attributable to to technology  borrowing and its successful implementation

It is possible that countries at Higher level of GDP do not sustain higher growth rates.
7. Compare Latin America with East Asia
8. Compare Latin America with South Asia

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Is GDP a good estimator of welfare?

1.  GDP measures the domestic production

2.  It also largely points out to domestic consumption
3.  The difference be accounted for by exports and imports
4.  However,  it does not account for people's welfare associated with non-market factors
5.  Such as Natural environments,  Environment protection,  domestic services of family
members
6. Several general welfare measures were developed by incorporating non economic factors
7. UNDP developed HDI
8. HDI is Human Development Index

9. Premise is:  is ultimate goal of economic development is not to increase output of  market
based production,  but to achieve maximum exploitation of human capability that is latent to
all the people in the world

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

HDI  index is calculated as a simple average of three indexes:
1.  Life expectancy at birth as a measure of long and healthy life
2.  The level of education measured as the weighted average of adult literacy rate and combined
primary and tertiary school  enrolment ratio
3.  GDP per capita in PPP conversion as a measure of the standard of consumption and living

4. Index ranges from 0 to 1

5. Since HD includes 2 two factors which are highly related to economic growth: 
6. Level of education and GDP per capita, 
7. The spearman's correlation is high between HD and GDP per capita
8. Despite this HD is a very important and unique indicator.

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Quiz 1 will be replaced by an assignment on chapter 2
https://www.youtube.com/watch?v=tboPF8w-554

Thank You

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956