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

Development 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 (3),  South Asia (3),  East Asia (4),  Latin America (3), and OECD (4)

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

1. Methods for conversion of GDP from local currency to comparable units

2. One can use current exchange rates (or base year exchange rate)
3. For GDP can be converted using purchasing power parity
–PPP ( base year chosen) 
https://www.youtube.com/watch?v=pbIhGTJe41k

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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
=> In currency exchange rates calculated in international markets, only traded goods & services are counted

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

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Use of forex rate vs. PPP (purchasing power parity)
PPP: Macroeconomic metric to compare economic productivity and standards of living between countries
=> that compares different countries' currencies through a "basket of goods" approach

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 (nominal or real?)
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

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https://ourworldindata.org/economic-growth#the-world-economy-over-the-last-two-millennia
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 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,  S. 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. This is largely attributable to technology borrowing and its successful implementation

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

South and North Korea took dramatically different

social, economic, and political paths following the
end of fighting in the Korean War in 1953.

Economists find it difficult to analyze the North

Korean economy because data is either non-
existent or unreliable
South Korea's economy is now one of the world's
most advanced and productive in the world.
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Higher GDP per capita
but low growth rate
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 Is GDP a good estimator of welfare?
1. GDP measures the domestic production happening within nation’s geog. area
2. It also largely points out to domestic consumption
3. Domestic consumption – GDP => compensated by EXIM
4. The difference be accounted for by exports and imports
5. However,  it does not account for people's welfare associated with non-market factors
6. ..such as natural environments,  environment protection,  domestic services of family members
7. For that reason, aspects even associated with market factors could be compromised
8. Several general welfare measures were developed by incorporating non economic factors
9. UNDP developed HDI
10. HDI is Human Development Index
11. 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 (Inspired
from the works of Amartya Sen, 1999)

Calculating index for each and

then HDI – Part of project
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Changes in industrial  structure

1. Differences in economic growth and income groups across regions related to industrial
structure
2. Industrial structure means,  the role of agriculture,  industry (manufacturing) and
services
3. Petty Clark law:  
the center of gravity of economic activities shifts from primary sector to the secondary,  and
then to the tertiary ( service)  sector as economy becomes stronger.
4. Inter-sectoral allocation of resources depends on each sectors prospects  for  wages and
prices of different resources  along with growth opportunities
5. Is initial per capita income related to how fast this change will occur?
6. Depends on how the government promotes it and how the economy behaves
A country with a low GDP per capita but a high HDI is Bhutan.
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A country with a low GDP per capita but a high HDI is Bhutan.

GDP per capita HDI

Bhutan $ 2500 0.729
China $ 10,000 0.758
India $ 1850 0.645 (as of 2021)
53 11 36 25 24 51

38 35 27 16 51 33
 How industrialization was driven by:
Evolution post WW II Govt. policies, capital accumulation,
external debt, Increase in human capital
1. Several developing countries gained independence after World War 2
2. Under colonialism, they were primarily suppliers of primary commodities or market for
manufactured goods for the developed nations
3. After independence, they design policies to transform their economies from being
heavily dependent on primary production to industrial activities
4. An important tool was ISI or import substitution industrialization
5. This was adopted between 1950 and 1970s 
6. The aim was to secure domestic markets for domestic manufacturers by suppressing
foreign competition with bringing: import tariff, import quotas and foreign exchange
licensing
7. Domestic manufacturers: low K, less skilled labour and not-so-developed technology
8. These protective policies did foster economic development for developing economies
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The Merchandise export pattern and growth

1. The Merchandise export pattern  was however different

2. Merchandise export is a major earner of foreign currency,  which makes a country stronger
3. Merchandise Exports consists of (primary + industrial) products
4. Countries where  per capita natural resource endowments  was low, could show higher share of
industrial output in total merchandise exports
5. Like India and China, others like Latin American countries lagged behind

This happens because:

 When per capita natural resources are less, most of the primary sector output get consumed in
the country itself, saving very little for exports
 Additionally in these countries, citizens move to you using capital intensive technologies for or
manufacturing industries,  which are more man dependent for their generation
 Where govt. have failed in keeping a stable support – peace, corruption, industrial protection, like
African nations (eg. Nigeria), eco growth fails to take off.

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 How industrialization was driven by:
Industrialization & capital accumulation Govt. policies, capital accumulation,
external debt, Increase in human capital

1. In general higher industrialization would parallelly lead to capital accumulation,  development of

human skills and production capacities. 
2. This in turn would lead to competitive industrial activities and more exports
3. However,  in some economies where failure to provide industrial production to domestic industries
(really infant in development),  lead to failure in becoming globally competitive. 
4. Even when protection is available, industry might fail (example, textile in India)….productivity
remained low due to tech. used, rigid labour laws, competition from China
5. This is measured by the competitive industrial performance index (CID)…next slide
6. A case in point it is a comparison of Indonesia and Nigeria ( page 41)
7.  Where timely intervention by government to encourage the right kind of industry lead one country
to gain increasing GDP ( Indonesia),  while the other country( Nigeria),  stagnated. 
8. Indonesia,  largely substituted “protection of domestic industries by restricting imports”  by ” export-
oriented industrialization”.  
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Nigeria
1. Multi-religious and multi-lingual
2. Its chaotic sociopolitical and
economic environment
3. Lack of leader with the skills and
knowledge to address the systemic
bottlenecks
4. Unbridled corruption
5. Non-functional health care
6. Poor education systems
7. Lacking institutions and infrastructure
8. => weak economy, rising youth
unemployment, poverty & insecurity
9. Overdependence on oil exports,
leading to a lack of diversification in
the economy and vulnerability to
fluctuations in oil prices.
Role of international moderators and
supporting institutions
Context: 
1. Beginning of 1980s saw failure of ISI  policies in developing economies
2. Many African and Latin American countries then adapted structural adjustment policies or SAP 
recommended by IMF and World Bank.

3. IMF and World Bank together with National governments will often push change of
policies and institutional framework to pull countries out of low growth traps and
stagnation

4. For example, In 1980s,  African and Latin American countries were almost compelled to
follow structural adjustment policy(SAP),  instead of ISI  for revival and growth. 
5. Check from table 2, how for these two regions, the share of manufacturing/industrial
sector contracted.

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 Latin America hyperinflation in 1980s

TOP Five Worst cases of Hyperinflation in History: https://www.youtube.com/watch?v=qYHOCbEekR0

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 1. Better health and education will
lead to higher growth and
eventually development
2. Higher growth in GDP  will lead
to more expense on education
and health
3. So both the casualty and reverse
causality work

1. Countries want to put their

investment in buying technology
and conventional capital  as that
gives quick returns
2.  however, making this work also
requires education and health of
citizens
3.  Thus,  the investments made in
this way do not work up to their
full potential
4.  this eventually leads to slow
growth of GDP per capita  with
the same technologies

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Discount rate

1. Discount rate is one of the factors to understand the worthiness of a project or

investment
2. The discount rate is a measure of how much return one expects from a project. 
3. A high discount rate is used for calculating the  worthiness of projects that are risky 
4. A low discount rate is used for calculating worthiness of projects that are welfare-
oriented and critical

The use of a high discount rate implies that people put less weight on the future and therefore that less
investment is needed now to guard against future costs. ...

The use of a low discount rate supports the view that we should act now to protect future generations
from climate change impacts.

https://www.youtube.com/watch?v=Mol1yT7tczY

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Now 5 years later
HDI, new HDI: Part of 1st assignment

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 HDI includes 2 two factors which are highly related to economic growth: 
6. Level of education and GDP per capita,  1st assignment: Presentation
7. The spearman's correlation is high between HD and GDP per capita ….5+5 ……10% …..7th Feb to
8. Despite this HD is a very important and unique indicator.
28th March

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

Topic: Population, natural & food resources- to be covered by assign.

Thank You

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Presentation assignment (10%)

The class list will be shared with everyone

Students are expected to interact with each other and form groups of three
Subsequently each group feels up Google form to freeze the groups
Deadline for this is 8 February,  Tuesday

Part A: 5%
1. Each group selects two developed countries and two developing countries 
2.  refer to the definition of developed versus developing from united nations portal
3.  For each of these four countries construct the human development index  and the new human development index,  giving
statistics,  it’s source and the workout based on formula
4.  For the last 20 years,  provide average GDP per capita in blocks of 5 years for each of the countries. 
5. Provide GDP per capita both as per current exchange rate and PPP
6. Submission date: 23rd Feb. 

Part B: 5%
7. For any one developing country map, increase in average school in years,  increase in life expectancy and increase in in
food production per capita for each block of timespan,  all of these against growth rate of GDP per capita
8. Provide all statistics  in tabular form before  displaying them on graphs. 
9.  Provide,  driving factors and obstacles for what is seen in the  3 graphs  by giving details like year,  incident,  stakeholders
and its impacts. 
10. Submission date: 28th March
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