Econ 355

Lecture 1 slides

Econ 355 Course Info

Instructor: Alex Karaivanov (please call me Alex) email: akaraiva@sfu.ca office: WMX 3629 office hours: Mondays 11:30-12.30 class website: www.sfu.ca/~akaraiva/e355.html syllabus, assignments and notes will be posted online syllabus link: www.sfu.ca/~akaraiva/e355syl12.htm no tutorials first week of classes

What is development?
Three Nobel prize winners answer: Robert Lucas: the problem of economic development is to account for the observed pattern across countries and across time in levels and rates of growth of per capita income. Amartya Sen: Development can be seenas a process of expanding the real freedoms that people enjoy. Joseph Stiglitz: A study of LDCs is to economics what the study of pathology is to medicine (..) the difference is that in economics, pathology is the rule: less than a 1/4 of mankind lives in the developed economies.

Development economics (DE)

DE is an applied field in the economic science
uses theory and methods from macroeconomics, microeconomics and econometrics.

The mission of DE is two-fold:

1. Diagnosis: what are the problems of developing countries? Must use reliable data and economic theory to define. 2. Trying to define a treatment strategy critically depends on 1.; pitfalls of top-down or one-policy-fits-all approaches, especially if not based on solid economic data and theory.

DE is probably the area of economics in which one can make the biggest difference
development can significantly affect the life of the vast majority of people in the world.

This Course
will study the economic structure and transformation of developing countries (definition coming up) 1. macro level: economic growth, income distribution, political economy of countries as a whole or cross-country comparisons using macroeconomic theory and country-level data 2. micro level: individual sectors (agriculture, education, etc.), institutions or issues (using microeconomics and household-level data)

Two levels of analysis:

Questions:
1. What major economic forces drive growth and development? 2. What structural features characterize developing countries? will not offer unambiguous answers to the problems of development, only teach you how to pose the right questions.

Why should we care?

(from Easterly ch. 1) Infant mortality rate: 4 of 1,000 in richest 20% of countries vs. 200 of 1,000 in poorest 20% of countries; The poorest of the poor: huge within-country variation in income (poorest double-cursed) Eating: hunger - daily calorie intake 1/3 lower in poorest 20% of countries than in richest 20%. Oppression: debt bondage; child labor (incl. prostitution, child soldiers); oppression of women. Growth and poverty: two ways to make poor better off:
1. redistribute income from rich to poor or 2. allow incomes of both rich and poor to rise with economic growth; Chen and Ravallion, Dollar show the latter has made much more difference to the poor around the world (see Easterly, ch. 1 for more details or the original studies)

How the Other Half Live

When one is poor, she has no say in public, she feels inferior. She has no food, so there is famine in her house; no clothing, and no progress in her family.
A poor woman from Uganda

For a poor person everything is terribleillness, humiliation, shame. We are cripples; we are afraid of everything; we depend on everyone. No one needs us. We are like garbage that everyone wants to get rid of.
A blind woman from Tiraspol, Moldova

Life in the area is so precarious that the youth and every able person have to migrate to the towns or join the army at the war front in order to escape the hazards of hunger escalating over here.
Participant in a discussion group in rural Ethiopia

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Definitions and measures of development

What do we mean by developing countries?
usually defined by income (gross national income, GNI) per capita

World bank classification (Table 2.1)

low-income countries (LIC): with p.c. income in 2005 below $875 lower-middle-income countries (LMC): $876 $3,465 upper-middle-income countries (UMC): $3,466 - $10,725 high-income countries (HIC): above $10,725 (OECD and nonOECD)

Developing countries = LIC + LMC + HMC

cover huge income range; careful to not over-generalize developing can be a misnomer, some countries are not growing; often called less developed countries (LDC) instead.

Table 2.1 Classification of Economies by Region and Income, 2010

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

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

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Figure 2.1 Nations of the World, Classified by GNI Per Capita

Source: Data from Atlas of Global Development, 2nd ed., pp. 1011. Collins Bartholomew Ltd., 2010.
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Definitions and measures of development

Most immediate and easiest to produce measure of development is income per capita, either GDP per capita, or GNI per capita. GDP (Gross Domestic Product)
the sum of all income earned by the factors of production located in a given country.

GNI (Gross National Income)

the sum of all income earned by the factors of production owned by the residents of a given country labor income of a Canadian working in the US counts as part of Canadian GNI and also in United States GDP. the two measures are very highly correlated though

Comparing country incomes: exchange rate method

To make the measures of income per capita comparable across countries, one could use the exchange rate between the currencies of these countries (or, the exchange rate with the USD)
Example: on Jan. 9, 2012 one US dollar trades for 6.314 Chinese Yuan Thus, China GNI in USD = China GNI in Yuan / 6.314

Problem 1: market exchange rates fluctuate a lot, even in very short intervals of time
if the Indian rupee appreciates by 10% next month, are Indians 10% richer? (even though output produced in each country did not change)

Comparing country incomes: exchange rate method

Problem 2: the comparison of GNI at market exchange rates systematically understates the relative income of developing countries.
the price of goods traded in international markets, relative to goods that are not traded (e.g. haircuts, a meal in a restaurant), tends to be much higher in poor countries than in rich countries in local currencies. exchange rates are based on the exchange of traded/tradable goods (demand and supply of currency). thus, people in LDCs actually have more purchasing power than their exchange rate income suggests.

Comparing country incomes: Purchasing Power Parity (PPP) method

PPP: compute in local currency the prices of the same standardized basket composed of both traded and nontraded goods and services for a large set of countries. Then construct an exchange rate by taking the ratio of the basket prices for each country pair (e.g., the Penn World Tables by Summers and Heston) PPP adjusts for the fact that many non-tradeables (e.g. services) are much cheaper in developing countries (think why is that!) Table 2.2 illustrates the differences between the exchange rate and PPP measures of income per capita.

Table 2.2 A Comparison of Per Capita GNI, 2008

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PPP example
Adjusting for purchasing power can make a big difference!
per capita TVs produced Rich country Poor country 4 1 per capita haircuts produced 40 10 price of TVs in local currency 10 10 Price of haircuts (local currency) 2 1

Suppose the exchange rate with USD is 1:1 for both countries. Thus, GNIpoor p.c. = $20 and GNIrich p.c. = $120. The poor countrys income per capita is 1/6 that of the rich country using the exchange rate method. How about PPP? Suppose a basket of goods consists of 1 TV and 10 haircuts. This costs 30 in the rich country and 20 in the poor. Thus, the PPP exchange rate is 3:2 (not 1!). Thus, the $20 in the poor country has the same purchasing power as $30 in the rich country only 1/4 (not 1/6!) the income p.c. of the poor country. conclusion: poor countries are richer than exchange rates imply; rich countries are poorer.

Measuring development beyond income per capita

Basic development indicators (Table 2.3)
countries with same incomes per capita may sometimes look quite different in various dimensions (use Gapminder and look at life expectancy; education)

The Human Development Index (developed by UNDP)

ranks countries on a scale of 0 (lowest human development) to 1 (highest human development) based on three indices (0 to 1):
longevity (measured by life expectancy at birth) knowledge (measured by 2/3 * adult literacy + 1/3 * gross school enrollment) standard of living (measured by real per capita GDP, PPP-adjusted; the income index assumes diminishing marginal utility of income)

HDI = 1/3 * (income index) + 1/3 * (life expectancy index) + 1/3 * (education index) idea: health and education as inputs into human capital (hard to measure GDP)

Table 2.3 Commonality and Diversity: Some Basic Indicators

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

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HDI Critiques
quality
school enrollment vs. quality of education; an extra year of life at 80 vs. at 30.

the 1/3 weights are arbitrary some people say HDI is redundant its correlation with standard GNI or GDP measures is very high
R. Lucas was probably right in his definition (see slide 1) GDP p.c. very correlated to HDIs main components, longevity and education (see Gapminder) or even happiness (table)

what if HDI included democracy as well, however? BUT correlation is not 1:1 (Table 2.5) so this more nuanced indicator may be useful

Figure 1.2 Income and Happiness: Comparing Countries

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

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Figure 2.3 Human Development Disparities within Selected Countries (continued)

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 The New Human Development Index Introduced by UNDP in November 2010

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What is new in the New HDI? 1. Calculating with a geometric mean

Probably most consequential: The index is now computed with a geometric mean, instead of an arithmetic mean A geometric mean is also used to build up the overall education index from its two components Traditional HDI added the three components and divided by 3 New HDI takes the cube root of the product of the three component indexes The traditional HDI calculation assumed one component traded off against another as perfect substitutes, a strong assumption The reformulation now allows for imperfect substitutability

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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 todays 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

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Table 2.6

The 2010 New Human Development Index (NHDI), 2008 Data

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HDI 2010 index

Source: HDRO own calculations Let's Talk Human Development - Data challenges in estimating the HDI: The cases of Cuba, Palau and the Occupied Palestinian Territory Human Development Index (HDI) value HDI rank Country 169 countries HDI value HDI rank VERY HIGH HUMAN DEVELOPMENT 1 Norway 2 Australia 3 New Zealand 4 United States 5 Ireland 6 Liechtenstein 7 Netherlands 8 Canada 9 Sweden 10 Germany 11 Japan 12 Korea (Republic of) 13 Switzerland 14 France 15 Israel 16 Finland 17 Iceland 18 Belgium 19 Denmark 20 Spain 21 Hong Kong, China (SAR) 22 Greece 23 Italy 24 Luxembourg 25 Austria 26 United Kingdom 27 Singapore 28 Czech Republic 29 Slovenia 30 Andorra 31 Slovakia 32 United Arab Emirates 33 Malta 34 Estonia 35 Cyprus 36 Hungary 37 Brunei Darussalam 38 Qatar 39 Bahrain 40 Portugal 41 Poland 42 Barbados 43 Bahamas HIGH HUMAN DEVELOPMENT 44 Lithuania 45 Chile 46 Argentina 47 Kuwait 48 Latvia 49 Montenegro 50 Romania 51 Croatia 52 Uruguay 53 Cuba 54 Palau 55 Libyan Arab Jamahiriya 56 Panama 57 Saudi Arabia 58 Mexico 59 Malaysia 60 Bulgaria 61 Trinidad and Tobago 62 Serbia 63 Belarus 64 Costa Rica 65 Peru 66 Albania 67 Russian Federation 68 Kazakhstan 69 Azerbaijan 70 Bosnia and Herzegovina 71 Ukraine 72 Iran (Islamic Republic of) 73 The former Yugoslav Republic of Macedonia 74 Mauritius 75 Brazil Human Development Index (HDI) value 172 countries HDI value

VERY HIGH HUMAN DEVELOPMENT 1 Norway 2 Australia 3 New Zealand 4 United States 5 Ireland 6 Liechtenstein 7 Netherlands 8 Canada 9 Sweden 10 Germany 11 Japan 12 Korea (Republic of) 13 Switzerland 14 France 15 Israel 16 Finland 17 Iceland 18 Belgium 19 Denmark 20 Spain 21 Hong Kong, China (SAR) 22 Greece 23 Italy 24 Luxembourg 25 Austria 26 United Kingdom 27 Singapore 28 Czech Republic 29 Slovenia 30 Andorra 31 Slovakia 32 United Arab Emirates 33 Malta 34 Estonia 35 Cyprus 36 Hungary 37 Brunei Darussalam 38 Qatar 39 Bahrain 40 Portugal 41 Poland 42 Barbados HIGH HUMAN DEVELOPMENT 43 Bahamas 44 Lithuania 45 Chile 46 Argentina 47 Kuwait 48 Latvia 49 Montenegro 50 Romania 51 Croatia 52 Uruguay Libyan Arab Jamahiriya 53 54 Panama 55 Saudi Arabia 56 Mexico 57 Malaysia 58 Bulgaria 59 Trinidad and Tobago 60 Serbia 61 Belarus 62 Costa Rica 63 Peru 64 Albania 65 Russian Federation 66 Kazakhstan 67 Azerbaijan 68 Bosnia and Herzegovina 69 Ukraine 70 Iran (Islamic Republic of) 71 The former Yugoslav Republic of Macedonia 72 Mauritius 73 Brazil 74 Georgia 75 Venezuela (Bolivarian Republic of)

0.938 0.937 0.907 0.902 0.895 0.891 0.890 0.888 0.885 0.885 0.884 0.877 0.874 0.872 0.872 0.871 0.869 0.867 0.866 0.863 0.862 0.855 0.854 0.852 0.851 0.849 0.846 0.841 0.828 0.824 0.818 0.815 0.815 0.812 0.810 0.805 0.805 0.803 0.801 0.795 0.795 0.788

0.938 0.937 0.907 0.902 0.895 0.891 0.890 0.888 0.885 0.885 0.884 0.877 0.874 0.872 0.872 0.871 0.869 0.867 0.866 0.863 0.862 0.855 0.854 0.852 0.851 0.849 0.846 0.841 0.828 0.824 0.818 0.815 0.815 0.812 0.810 0.805 0.805 0.803 0.801 0.795 0.795 0.788 0.784

0.784 0.783 0.783 0.775 0.771 0.769 0.769 0.767 0.767 0.765 0.755 0.755 0.752 0.750 0.744 0.743 0.736 0.735 0.732 0.725 0.723 0.719 0.719 0.714 0.713 0.710 0.710 0.702 0.701 0.701 0.699 0.698 0.696

0.783 0.783 0.775 0.771 0.769 0.769 0.767 0.767 0.765 0.760 0.757 0.755 0.755 0.752 0.750 0.744 0.743 0.736 0.735 0.732 0.725 0.723 0.719 0.719 0.714 0.713 0.710 0.710 0.702 0.701 0.701 0.699

76 77

Armenia Ecuador

0.695 0.695

MEDIUM HUMAN DEVELOPMENT 78 Belize 79 Colombia 80 Jamaica 81 Tunisia 82 Jordan 83 Turkey 84 Algeria 85 Tonga 86 Fiji 87 Turkmenistan 88 Dominican Republic 89 China 90 El Salvador 91 Sri Lanka 92 Thailand 93 Gabon 94 Suriname 95 Bolivia 96 Paraguay 97 Philippines 98 Botswana 99 Moldova (Republic of) 100 Mongolia 101 Egypt 102 Uzbekistan 103 Micronesia (Federated States of) 104 Guyana 105 Namibia 106 Honduras Maldives 107 108 Indonesia 109 Kyrgyzstan 110 South Africa 111 Syrian Arab Republic 112 Tajikistan 113 Viet Nam 114 Morocco 115 Nicaragua 116 Guatemala 117 Equatorial Guinea 118 Cape Verde 119 India 120 Timor-Leste 121 Swaziland 122 Lao People's Democratic Republic 123 Solomon Islands 124 Cambodia 125 Pakistan 126 Congo 127 Sao Tome and Principe LOW HUMAN DEVELOPMENT 128 Kenya 129 Bangladesh 130 Ghana 131 Cameroon 132 Myanmar 133 Yemen 134 Benin 135 Madagascar 136 Mauritania 137 Papua New Guinea 138 Nepal 139 Togo 140 Comoros 141 Lesotho 142 Nigeria 143 Uganda 144 Senegal 145 Haiti 146 Angola 147 Djibouti 148 Tanzania (United Republic of) 149 Cte d'Ivoire 150 Zambia 151 Gambia 152 Rwanda 153 Malawi 154 Sudan 155 Afghanistan 156 Guinea 157 Ethiopia 158 Sierra Leone 159 Central African Republic

0.694 0.689 0.688 0.683 0.681 0.679 0.677 0.677 0.669 0.669 0.663 0.663 0.659 0.658 0.654 0.648 0.646 0.643 0.640 0.638 0.633 0.623 0.622 0.620 0.617 0.614 0.611 0.606 0.604 0.602 0.600 0.598 0.597 0.589 0.580 0.572 0.567 0.565 0.560 0.538 0.534 0.519 0.502 0.498 0.497 0.494 0.494 0.490 0.489 0.488

76 77 78 79 80 81 82 83 84 85 86

Georgia Venezuela (Bolivarian Republic of) Armenia Ecuador Belize Colombia Jamaica Tunisia Jordan Turkey Algeria

0.698 0.696 0.695 0.695 0.694 0.689 0.688 0.683 0.681 0.679 0.677

MEDIUM HUMAN DEVELOPMENT 87 Tonga 88 Fiji 89 Turkmenistan 90 Dominican Republic 91 China 92 El Salvador 93 Sri Lanka 94 Thailand 95 Gabon 96 Suriname 97 Occupied Palestinian Territory 98 Bolivia 99 Paraguay 100 Philippines 101 Botswana 102 Moldova (Republic of) 103 Mongolia 104 Egypt 105 Uzbekistan 106 Micronesia (Federated States of) Guyana 107 108 Namibia 109 Honduras 110 Maldives 111 Indonesia 112 Kyrgyzstan 113 South Africa 114 Syrian Arab Republic 115 Tajikistan 116 Viet Nam 117 Morocco 118 Nicaragua 119 Guatemala 120 Equatorial Guinea 121 Cape Verde 122 India 123 Timor-Leste 124 Swaziland 125 Lao People's Democratic Republic 126 Solomon Islands 127 Cambodia 128 Pakistan 129 Congo LOW HUMAN DEVELOPMENT 130 Sao Tome and Principe 131 Kenya 132 Bangladesh 133 Ghana 134 Cameroon 135 Myanmar 136 Yemen 137 Benin 138 Madagascar 139 Mauritania 140 Papua New Guinea 141 Nepal 142 Togo 143 Comoros 144 Lesotho 145 Nigeria 146 Uganda 147 Senegal 148 Haiti 149 Angola 150 Djibouti 151 Tanzania (United Republic of) 152 Cte d'Ivoire 153 Zambia 154 Gambia 155 Rwanda 156 Malawi 157 Sudan 158 Afghanistan 159 Guinea

0.677 0.669 0.669 0.663 0.663 0.659 0.658 0.654 0.648 0.646 0.645 0.643 0.640 0.638 0.633 0.623 0.622 0.620 0.617 0.614 0.611 0.606 0.604 0.602 0.600 0.598 0.597 0.589 0.580 0.572 0.567 0.565 0.560 0.538 0.534 0.519 0.502 0.498 0.497 0.494 0.494 0.490 0.489

0.470 0.469 0.467 0.460 0.451 0.439 0.435 0.435 0.433 0.431 0.428 0.428 0.428 0.427 0.423 0.422 0.411 0.404 0.403 0.402 0.398 0.397 0.395 0.390 0.385 0.385 0.379 0.349 0.340 0.328 0.317 0.315

0.488 0.470 0.469 0.467 0.460 0.451 0.439 0.435 0.435 0.433 0.431 0.428 0.428 0.428 0.427 0.423 0.422 0.411 0.404 0.403 0.402 0.398 0.397 0.395 0.390 0.385 0.385 0.379 0.349 0.340

160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194

Mali Burkina Faso Liberia Chad Guinea-Bissau Mozambique Burundi Niger Congo (Democratic Republic of the) Zimbabwe Antigua and Barbuda Bhutan Cuba Dominica Eritrea Grenada Iraq Kiribati Korea (Democratic People's Rep. of) Lebanon Marshall Islands Monaco Nauru Occupied Palestinian Territory Oman Palau Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Samoa San Marino Seychelles Somalia Tuvalu Vanuatu

0.309 0.305 0.300 0.295 0.289 0.284 0.282 0.261 0.239 0.140 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194

Ethiopia Sierra Leone Central African Republic Mali Burkina Faso Liberia Chad Guinea-Bissau Mozambique Burundi Niger Congo (Democratic Republic of the) Zimbabwe Antigua and Barbuda Bhutan Dominica Eritrea Grenada Iraq Kiribati Korea (Democratic People's Rep. of) Lebanon Marshall Islands Monaco Nauru Oman Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Samoa San Marino Seychelles Somalia Tuvalu Vanuatu

0.328 0.317 0.315 0.309 0.305 0.300 0.295 0.289 0.284 0.282 0.261 0.239 0.140 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

Characteristics of the developing world: diversity within commonality

As we saw, developing countries differ a lot among each other, yet there are more or less common traits: 1. Lower levels of income and productivity (fig. 2.4)
poverty traps?: low income lower investment in education/health/capital low productivity low income but how to explain growth miracles S. Korea, Taiwan, China were once among the world poorest. country size does not matter there are rich and poor among all sizes (Table 2.6 and Gapminder)

Figure 2.4 Shares of Global Income, 2008

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

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Characteristics of the developing world: diversity within commonality

2. Lower levels of human capital (health + education)
under-5 mortality 15 times higher in LICs vs. HICs (fig. 2.5) enrollment rates (% children of primary school age in school) are also significantly lower. Caution: enrollment vs. actual attendance (or teacher absence) correlation between under-5 mortality and mothers schooling (fig. 2.6) but need to be careful interpreting and control for income level.

Figure 2.5 Under-5 Mortality Rates, 1990 and 2005

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Table 2.8 Primary School Enrollment and PupilTeacher Ratios, 2010

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Figure 2.6 Correlation between Under5 Mortality and Mothers Education

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Characteristics of the developing world: diversity within commonality

3. Higher levels of inequality and poverty
globally, the poorest 20% of all people (> 1 bln) earn 1.5% of world income (these are the poorest people in the poorest ctrs) high income inequality within developing countries need to look beyond averages the level of absolute poverty (e.g. %population living with <$1 a day) depends on:
1. the average income level in the country 2. the distribution of income in the country

Fig. 2.7 depicts the geographical distribution of poverty (number of people below $1/day) in the world most reduction in poverty last 30 years achieved in East Asia; poverty increased in sub-Saharan Africa (high birth rates); virtually no reduction overall (although the poverty rate has fallen)

Figure 2.7 People Living in Poverty, 1981-2002

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Figure 2.7 Number of People Living in Poverty by Region, 19812005

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Characteristics of the developing world: diversity within commonality

4. Higher population growth rates (Table 2.8)
population growth recently focused in developing countries LICs grew at 2.2% per year, MICs at 1.1%, HICs at 0.7% (incl. immigration, still many at 0 or negative) death rates: also higher in LDCs at each age bracket (but not overall - Gapminder) dependency ratios: children under 15 are 32% of the population in LDC vs. 17% in HICs; people over 65 the reverse is true; overall (young and old over people 15-64 = 1/3 in HICs (but growing) and 40% in LDCs. There are substantial regional variations (44% below age 15 in sub-S Africa vs. 19% in Asia).

Table 2.9 Crude Birth Rates Around the World, 2009

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Characteristics of the developing world: diversity within commonality

5. Higher social fractionalization?
ethnic, linguistic, religious and other social divisions more widespread in LICs; sometimes associated with civil strife or violent conflicts Easterly and Levine present evidence that many factors associated with low development can be explained by high ethnic fragmentation (e.g., colonial-era drawing of borders in Africa) Is diversity bad (conflict) or good (creativity, innovation)? Canada vs. Africa? Income level and diversity seem to interact.

Economics 270c: Lecture 6

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Characteristics of the developing world: diversity within commonality

6. Larger rural population and rapid rural-urban migration
shift away from subsistence agriculture for most of the population is one of the hallmarks of development in LDCs a much higher fraction of the population lives in rural areas (Table 2.9) why does this matter? Rural areas are poorer and suffer more from missing markets, limited information, worse rule of law, social stratification. massive rural-urban migration in LDCs rapid urbanization with its own problems

Table 2.9 The Urban Population in Developed Countries and Developing Regions

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Table 2.10 The Urban Population in Developed Countries and Developing Regions

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Characteristics of the developing world: diversity within commonality

7. Economy structure
HICs often called industrialized. Large differences in the economy structure with LDCs (Table 2.10) agriculture: 1-2% of GDP and employment in HICs (yet they are exporters) but up to 80% in LDCs (yet famines happen) industry: 20-30% of GDP in HICs; actually higher in LDCs (see table) services: together with agriculture this is the sector the HICs and LDCs differ the most, as % of GDP.

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

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Characteristics of the developing world: diversity within commonality

8. Geography
a controversial factor. According to some economists (e.g. J. Sachs) poor geography is to blame for the state of subSaharan Africa (tropical diseases, water resource constraints, heat, landlockedness) distance from the equator explains a lot of the cross-country difference in income per capita (Gapminder) others point out inconsistencies with such views other tropical parts of the world have become highly developed (South-East Asia); many land-locked European countries are doing well too. natural resources a blessing (Norway, some Arab countries, Canada?) or a curse DRC, Nigeria, etc.

Characteristics of the developing world: diversity within commonality

9. Underdeveloped/imperfect financial and other markets
greater prevalence of problems of asymmetric information (moral hazard, adverse selection); limited enforcement (inability to enforce contracts or laws); limited commitment (inability to commit to future actions or policies) in LDCs markets can be missing (e.g. no insurance against flood) of result in inefficient outcomes (e.g. poor people with good investment ideas rationed out from credit markets). the presence of market failures does not imply automatically that government intervention can fix the problem (can the govt resolve the asym. info problem? isnt the govt subject to the same inefficiencies?) policy: must address the root causes of the market imperfections, not their symptoms (e.g. subsidized credit); economic theory and data must be put to serious use!

Characteristics of the developing world: diversity within commonality

10. Institutions and political economy
poor institutions often first to blame for the lack of development. but what causes poor institutions? geography? colonial policies? causality problems: does low income cause bad institutions or is it the other way around? interesting new research shows institutions matter for development (settler mortality, reversal of fortunes studies) long-run consequences of early institutions. political systems: does democracy matter? (Gapminder). No correlation between measures of democracy and GDP per capita. Many (most?) growth miracles happened in nondemocratic countries, yet all OECD countries are democratic. political economy: how to implement reforms, corruption another exciting new area of research in development.

Figure 4: Relationship between GDP per capita and illiteracy rate

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Source: Economic Growth, David Weil, 2004.