ECON 3066 Economic Development

Lecture 2: Differences and Commonalities among Developing Countries

Comparative Development
Natalya Brown 2008

LECTURE 2: Comparative Development

Comparative Development

Overview:
Defining the Developing World Structural Diversity of Developing Economies Common Characteristics of Developing Nations Developing Countries today versus Developed Countries in their Early Stages Are Living Standards Converging?

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LECTURE 2: Comparative Development

Defining the Developing World

Per Capita Income

The World Bank uses Gross National Income (GNI) per capita to classify economies into the following categories:
Low Income Countries (LICs) Lower Middle Income Countries (LMCs) Upper Middle Income Countries (UMCs) High Income OECD countries Other High Income Countries OECD Organization of Economic Cooperation and Development
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Defining the Developing World (contd)

Those countries that fall into the LIC, LMC and UMC categories are considered developing countries. Some High Income countries would also be considered developing due to their high levels of inequality, limited industry, etc. Geographical Classification: sub-Saharan Africa, North Africa and the Middle East, Asia (excluding Japan), Latin America and the Caribbean, the transition countries of Eastern Europe and Central Asia, including the former Soviet Union.

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The countries of Western Europe, North America, Japan, Australia and New Zealand are considered developed. Newly Industrialized Countries (NICs) is another category often used to classify those countries with relatively advanced manufacturing sectors. Countries are also classified in terms of International Indebtedness. UNs Human Development Index
Measures of health and education are included in the calculation along with income.
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It is important to note the wide income range among the countries of the developing world. These countries have shared goals such as:
Reduction of poverty, inequality and unemployment Provision of minimum levels of education, health care, housing and food Broadening of social and economic opportunities Forging a cohesive nation-state

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These common goals correspond to common problems:

Widespread and chronic absolute poverty High levels of unemployment and underemployment Growing inequality Low levels of agricultural productivity Urban and rural imbalance Antiquated and inappropriate health and educational systems Environmental decay Sever balance of payments and international debt crises Increasing significant dependence on foreign technologies, institutions and value systems

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LECTURE 2: Comparative Development

Structural Diversity of Developing Countries

1. Size and Income Level: physical size, size of

population and level of national income per capita are important determinants of economic potential. Advantages of size:
Diverse Resource Endowment Large Potential Markets More local sources for materials and products Difficulties in administrative control and national cohesion Increase likelihood of regional imbalances

Disadvantages of size:

No relationship between size and per capita income or size and the degree of inequality.

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Five Most and Least Populated Countries and Their PPP Per Capita GDP, 2003
Most Populous
China India United States

Population (millions)
1,314 1,095 298

GDP per Capita (US$)

5,003 2,892 37,562

Indonesia
Brazil

245
188

3,361
7,790

Least Populous
St. Kitts and Nevis Dominica Antigua and Barbuda Seychelles Kiribati
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Population (thousands)
39 69 69 82 105

GDP per Capita (US$)

12,404 5,448 10,294 10,232 567

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2. Historical Background
Former Colonies educational, political and social systems are often modeled on their former colonial rulers.
Colonial rulers introduced private property, personal taxation and the requirement that taxes be paid in money rather than kind, shattering pre-existing social orders and exposing local communities to potential exploitation. Varying degree of local involvement in colonial governance also separates some developing countries.

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3. Physical and Human Resources

Physical Resources land, minerals and other raw materials. Large physical endowments help but they are not a guarantee for development.
Coastal economies vs. landlocked economies Temperate Zone vs. Tropical Zone

Human Resources numbers of people and their level of skill. Other key factors include:
Cultural outlooks and attitudes toward work Access to information Flexibility to change and innovation Desire for self-improvement Quality of Public Administration

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4. Ethnic and Religious Composition

Noted acceleration in ethnic, tribal and religious conflict since the end of the Cold War. The greater the ethnic and religious diversity of a country, the greater potential for instability. Economists often point to the development success stories of relatively homogenous societies like Taiwan and Singapore. Diversity need not lead to inequality and turmoil.

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5. Mixture of the Economy and Civil Society

Most developing countries have mixed economic systems both public and private ownership and use of resources. The mix varies across developing countries. There is also variations in the degree of foreign ownership in the private sector. There has been a recent shift of emphasis from public sector activities and state-run enterprises to privatization in many LDCs. The appropriate development policies will depend on the mix of private and public sector ownership and activities.

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Mixture and Civil Societies (contd)

The degree of corruption also varies The role of non-governmental organizations (NGOs) is also important to the development process:
Social Problem-Solving Targeted Public Goods Provision Trust and Credibility Expanding Social Inclusion

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6. Industrial Structure
The majority of developing countries are agrarian in their social, economic and cultural outlook. The relative importance of the agricultural, manufacturing and service sectors varies widely across LDCs. Industrial Sectors
Primary: agriculture, forestry and fishing Secondary: Manufacturing Tertiary: Commerce, Finance, transport and services.

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LECTURE 2: Comparative Development

Industrial Structure in 2005

Percentage of Labor Force

Country Kenya Uganda India Philippines Brazil Mexico

Percentage of GDP

Agriculture
75 82 60 36 20 18

Industry
12 5 17 16 14 24

Agriculture Industry
16.3 31.3 18.6 14.4 8.4 3.8 18.8 22.1 27.6 32.6 40 25.9

United States
Source: The World Factbook
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0.7

22.9

20.4

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7. External Dependence
Dependence on foreign economic, social and political forces is related to size, resource endowment and political history and is substantial for most developing countries. Dependence on:
Foreign investment and trade Importation of foreign capital-intensive technologies of production International transmission of systems of education and governance.

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8. Political Structure, Power and Interest Groups

The distribution of power among military, industrialists, land owners, high-level civil servants, money lenders and so on, varies across countries Social and economic change requires either the support of the ruling elite or that the power of the elites be offset by more powerful democratic forces. The success of economic and social development hinges on the ability of social, political legal and economic institutions to change.

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LECTURE 2: Comparative Development

Annual Growth Rates of GDP per Capita (%)

1975-2003 1990-2003

Country Kenya Uganda

India
Philippines Brazil

Mexico
Haiti China
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0.2 2.6 3.3 0.3 0.8 0.9 -2.3 8.2

-0.6 3.9 4.0 1.2 1.2 1.4 -2.8 8.5

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Human Development Index

Index number between 0 and 1, combining income, health and education measures. High human development 0.895 Medium human development 0.718 Low human development 0.486

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Human Development Index 2003

HDI 0.367 0.418 GDP per Capita (PPP $US) 711 621

Country Ethiopia Tanzania

Bangladesh
China Malaysia

0.520
0.755 0.796

1,770
5,003 9,512

United States
Canada
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0.944
0.949

37,562
30,677

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Country

GDP per capita US$ PPP

HDI

HDI Rank

Life Expectancy at birth

Adult Literacy

GDP per capita around PPP$1000

Tajikistan
Kenya Central African Republic Burkina Faso GDP per capita around PPP$2000 Vietnam Pakistan Guinea Angola

1,106
1,037 1.089 1,174 2,490 2,097 2,097 2,344 3,778 4,104 3,361

0.652
0.474 0.355 0.317 0.704 0.527 0.466 0.445 0.751 0.738 0.697

122
154 171 175 108 135 156 160 93 98 110

63.6
47.2 39.3 47.5 70.5 63.0 53.7 40.8 74.0 70.8 66.8

99.5
73.6 48.6 12.8 90.3 48.7 41.0 66.8 90.4 87.6 87.9

GDP per capita around PPP$3500

Sri Lanka Jamaica Indonesia

Morocco
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4,004

0.631

124

69.7

50.7

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Common Characteristics

1. Low Levels of Living 2. Low Levels of Productivity 3. High Rates of Population Growth and Dependency Burdens 4. Dependence on Agricultural Production and Primary-Product Exports 5. Imperfect Markets and Incomplete Information 6. Dependence and Vulnerability in International Relations
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1. Low Levels of Living

Low Incomes measured by either Gross Domestic Product (GDP) per capita or Gross National Income (GNI) per capita
GDP the total value for final use of output produced by an economy, by both residents and nonresidents. GNI total domestic and foreign value added claimed by a countries residents without making depreciation deductions for the countrys capital stock.
GNI = GDP + (income residents receive from abroad payments made to nonresidents)

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Low Levels of Living (contd)

In 2002, over 80% of the worlds income was produced by 15% of the worlds population. When comparing GNI and GDP across countries using exchange rates, one must be careful. Conversion through exchange rates often does not reflect differences in domestic purchasing power.
Purchasing Power Parity (PPP) uses a common set of international prices for all good and services produced and valuing goods in all countries in US prices.

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Low Levels of Living (contd)

Inequality greater disparities between the income of the rich and poor in developed countries. Slow growth rates of national income and real income per capita Large portions of the population suffering from absolute poverty (living on less than PPP US $370). Low levels of literacy, significant school drop out rates, inadequate and irrelevant education. Ill health, high infant mortality, malnutrition, debilitating diseases All these characteristics interact to reinforce and perpetuate each other.
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LECTURE 2: Comparative Development

Extent of Poverty

Absolute Poverty: living below the minimum level of income needed to satisfy basic necessities International Poverty Line: US $1 per day There has a been an increase in the number of people living below the poverty line while there have been decreases in the proportion of the people living below this threshold in some areas. There has been a poverty shift in population towards the transition economies of Eastern Europe and Central Asia, and sub-Saharan Africa.

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LECTURE 2: Comparative Development

Purchasing Power Parity

PPP is defined as the number of units of a foreign countrys currency required to purchase the identical quantity of good and services in the local market as would US$1 buy in the United States. If domestic prices in LDCs are low, then measures of GNI per capita will be lower than those using PPP and will exaggerate differences. Example: Chinas GDP in 2002, was US$960 according to exchange rate conversion but using PPP it was US$4,520.

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Growth Rates of Real GNI Per Capita

1980-1990 1990-2000

Country Kenya Uganda India Philippines

0.3 0.8 3.2 -1.5

-0.3 4.1 4.2 1.0

Brazil
Mexico
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0.6
-0.9

1.5
1.5

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Human Development Index

UNDPs measure of socioeconomic development that attempts to rank all countries on a scale of 0 (low) to 1 (high) of human development based on three indicators of development. Knowledge: measured by a weighted average of adult literacy (2/3) and mean years of schooling (1/3) Longevity: measured by life expectancy at birth Standard of Living: measured by real per capita income adjusted for differences in purchasing power parity.

These three measures are combined into a formula to calculate the score.

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HDI (contd)

Country Categories:
Low Human Development: 0.0 to 0.499 Medium Human Development: 0.50 to 0.799 High Human Development: 0.80 to 1.0

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LECTURE 2: Comparative Development

Calculating HDI

Income Index (I.I.)

I.I. = [log(Y) log(100)] log (40,000) log(100)

where Y is the countrys PPP income per capita $100 is considered the lower goalpost for income. Life Expectancy Index (L.E.I.) L.E.I. = X 25 85-25 where X is the countrys life expectancy at birth.

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LECTURE 2: Comparative Development

Calculating HDI

Adult Literacy Index (A.L.I.) Gross Enrollment Index (G.E.I.) Education Index (E.I.):
E.I. = (2/3)(A.E.I.) + (1/3)(G.E.I.)

HDI=(1/3)(I.I.) + (1/3)(L.E.I.) + (1/3)(E.I.)

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LECTURE 2: Comparative Development

Human Development Index 2003

HDI 0.367 0.418 GDP per Capita (PPP $US) 711 621

Country Ethiopia Tanzania

Bangladesh
China Malaysia

0.520
0.755 0.796

1,770
5,003 9,512

United States
Canada
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0.944
0.949

37,562
30,677

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Country

GDP per capita US$ PPP

HDI

HDI Rank

Life Expectancy at birth

Adult Literacy

GDP per capita around PPP$1000 Tajikistan 1,106 0.652 122 63.6 99.5

Kenya
Central African Republic Burkina Faso GDP per capita around PPP$2000

1,037
1.089 1,174

0.474
0.355 0.317

154
171 175

47.2
39.3 47.5

73.6
48.6 12.8

Vietnam
Pakistan Guinea Angola GDP per capita around PPP$3500 Sri Lanka Jamaica Indonesia Morocco
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2,490
2,097 2,097 2,344 3,778 4,104 3,361 4,004

0.704
0.527 0.466 0.445 0.751 0.738 0.697 0.631

108
135 156 160 93 98 110 124

70.5
63.0 53.7 40.8 74.0 70.8 66.8 69.7

90.3
48.7 41.0 66.8 90.4 87.6 87.9 50.7

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Issues with HDI

Shows that at a low level of income a country can do much better than might be expected and that substantial income gains can still accomplish very little human development. Gross enrollment often overstates the amount of schooling. Weighting of components Quality of measures: e.g. schooling

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LECTURE 2: Comparative Development

Common Characteristics (contd)

2. Low Levels of Productivity

LDCs are characterized by low levels of labor productivity not just in physical abilities but also in
Managerial competence Access to information Worker motivation Institutional flexibility

These low levels are due in great part to the lack of complementary factors of production such as physical capital and managerial experience.

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Policies that encourage domestic and foreign investment in physical and human capital would go a long way in improving a countrys development potential. Other policies include:
Land reform Corporate Tax incentives Credit and Banking reform Independent, efficient and honest administrative services Restructuring of educational and training programs

The development success stories of the four Asian Tigers Hong Kong, Singapore, South Korea, Taiwan has often been attributed to the quality of their human resources There is an obvious link between health, nutrition and labour productivity mutually reinforcing interactions between low living levels and low productivity - vicious cycle.
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3. High Rates of Population Growth and Dependency Burdens There are significant differences in birth and death rates between the developing and developed world.
Crude Birthrate =
Yearly # of Live Births per 1000 population

Death Rate =

Yearly # of Death per 1000 population

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20 per 1000 population seems to be the dividing line with the majority of developing countries with birthrates exceeding and no developed countries with birthrates above this. While the death rate is also higher in developing countries, the difference is less than is the case with birthrates. Put together developing countries are experiencing higher rates of population growth.
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Demographic differences
As an implication of high LDC birthrates, children under 15 compose almost 40% of the total population in many developing countries. Compare this to 20% in developed nations. This means that the active labour force must support proportionally almost twice as many children as it does in richer countries.

Dependency Burden
This is the population of children and elderly The dependency burden is as high as 45% in some developing countries. On average it is a third of the population in developing countries. 90% of the dependency burden in developing countries are children as compared to 66% in the developed world. Later we will discuss the implications of population growth for economic development.

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4. Dependence on Agricultural Production and Primary-Product Exports

A large proportion of the population in LDCs are rurally-based and engaged in agricultural production Agriculture also contributes a larger percentage of gross national product than it does in developed nations Also, average productivity of agricultural labor is significantly greater in the developed countries. Low agricultural productivity is due to:
The number of people in relation to the available land Primitive technologies Poor organization Limited physical and capital inputs It is also often due to the systems of land tenure that exist.
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Why is there such a high concentration of the population of developing countries in agriculture?
At low incomes peoples first priorities are food, clothing and shelter.

Comparative Dependence on Primary Goods

Primary Goods: agricultural products, fuel, forestry and raw materials Most LDC economies are still oriented towards the production of primary goods, and these goods form their main exports Primary good exports account for a significant portion of foreign exchange earnings foreign exchange that is needed in order to finance development projects. Unfortunately most of the foreign exchange earned by exports has been used to pay interest on foreign debt by many LDCs. Many non-oil producing LDCs have also experienced slow export growth and declining prices for much of their simple manufactures (e.g. textiles and garments).

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5. Imperfect Markets and Incomplete Information

The benefits of market economies and market-friendly policies depend heavily on the existence of institutional, cultural, and legal prerequisites that we take for ranted in industrial societies. These institutions are often absent or weak in LDCs. What is needed:
A legal system that enforces contracts and defends property rights A stable and trustworthy currency Reliable infrastructure and utilities Well-developed system of banking and insurance Formal credit markets that assign financial resources based on profitability and enforce rules of payment Market information for consumers, producers, as well as information about creditworthiness for lenders. Norms of behaviour that facilitated long-term business relationships

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Markets in LDCs are often highly imperfect

Economies of scale and thin markets Widespread externalities Prevalence of common property

Information is limited and costly to obtain resulting in misallocation of resources.

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6. Dependence and Vulnerability in International Relations There exists a highly unequal distribution of economic and political power between rich and poor nations. The dominant power of rich nations is manifested in
their ability to dictate the patterns of international trade and the agreements regulating it their power to set the terms by which technology, foreign aid, and private capital are transferred to developing countries the transfer of developed world values, attitudes, institutions and standards of behaviour. inappropriate educational structures, curricula the formation of Western-style trade unions
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the curative model of health services as opposed to the preventative. influence on salary scales, elite lifestyles, and general attitudes toward the private accumulation of wealth. international brain drain. These transfer effects make developing countries more vulnerable to forces which are largely out of their control. In response, many small developing countries have joined forces economically to strengthen their bargaining power Some economists of the dependency school feel that governments of rich countries today act systematically and intentionally against the interests of developing countries.

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LECTURE 2: Comparative Development

Developing Countries of Today vs. Developed Countries in Their Early Stages

Differences in Initial Conditions: 1. Physical and human resource endowment 2. Relative per capita incomes and levels of GDP 3. Climate 4. Population size, distribution and growth 5. International Migration 6. International trade benefits 7. Basic scientific and technological R&D capabilities 8. Stability and flexibility of political and social institutions 9. Efficacy of domestic economic institutions
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LECTURE 2: Comparative Development

Resource Endowments

Most LDCs are less endowed with natural resources than the currently developed countries were at the time they began their modern growth. For those with natural resources, it is often the case that the countries lack the capital equipment needed to exploit their natural resources. Knowledge/Idea/Ingenuity Gap
No such human resource gap existed for the now developed countries on the eve of their industrialization.

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LECTURE 2: Comparative Development

Relative Incomes

LDCs on average have lower levels of real GDP per capita than the developed countries of today had in the 19th century. Todays developed countries were also in a more relatively favorable position they were economically in advance of the rest of the world at the beginning of their modern growth. Contrast that with the developing countries today who are in a relatively weaker economic position.

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Climate

Climatic Differences
Is it a coincidence that the most successful countries are located in the temperate zone and that most of the developing world is located in the tropical and sub-tropical zones? Differences in climatic conditions cannot be ignored. They affect
Soil quality and the rate of depreciation of natural resources Productivity of crops and the health of livestock Worker health, motivation, productivity and efficiency

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LECTURE 2: Comparative Development

Population Size, Distribution and Growth

Before and during their early stages of growth, developed countries experienced a slow rise in population growth, then growth rates increased in response to industrialization. However growth rates were never at the levels currently being experienced by the developing countries of today. Also, these large and rapidly growing populations are often concentrated geographically. LDCs today have higher person-to-land ratios than the European countries did in their early stages.

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LECTURE 2: Comparative Development

International Migration

International migration provided a major outlet for excess rural populations in the late 19th and early 20th centuries. For LDCs today there is very little scope for reducing the pressures of overpopulation through massive international emigration due to the distance and the very restrictive nature of immigration laws in modern developed countries Still we observe wide scale migration from developing countries to developed nations and an increase in illegal immigration. Often those who migrate are the ones that developing countries cannot afford to lose the highly educated and skilled workers.

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LECTURE 2: Comparative Development

Trade Benefits

International free trade was the engine of growth for many of todays advanced economies.
Expanding export markets and growing local demand encouraged the development of large scale manufacturing Political stability enabled foreign borrowing at low interest rates. Free trade, free capital movements, relatively unrestricted international migration of surplus labour

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Contrast this with the situation for LDCs today in which growth through trade is a difficult prospect. LDCs face:
Deteriorating terms of trade
Terms of trade: price received for exports relative to price paid for imports.

Difficulty gaining international financing at low interest rates Difficulty becoming competitive in manufacturing of products also produced by developed countries When they are competitive in production, they often face trade barriers (e.g. tariffs and import quotas) that restrict their export potential

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LECTURE 2: Comparative Development

R&D Capabilities

Over 90% of the worlds R&D expenditures originate in the developed world. Research funds are also channeled towards solving the economic problems of developed countries. Poor countries are interested in simple products and design that make use of their abundant labour force and save capital, focusing production for smaller markets. They often lack the financial resources and know-how to conduct R&D that is tailored to their own economic interests. Internal economic dualism The developed countries of today were technologically advanced relative to the rest of the world.

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LECTURE 2: Comparative Development

Political and Social Institutions

Well before their industrial revolutions, the now developed countries were independent consolidated nation-states able to pursue national policies on a basis of consensus toward modernization Many LDCs gained political independence recently and have yet to become consolidated nation-states. They still need to develop stable and flexible political institutions consolidated with broad public support. Research has shown that:
Growth is more influenced by the stability of the regime than by its type The transition from dictatorship to democracy may slow down growth but that stable democracies experience higher growth rates than dictatorships.

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LECTURE 2: Comparative Development

Domestic Economic Institutions

The quality of institutions in terms of transparency, ease and speed of conflict resolution mechanisms, the provision of property rights were of a higher calibre for the developing countries in their early stages. Often systems put in place by colonizers were established to help them maintain their own dominance and to extract resources rather than to encourage economic development.

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Convergence

Are living standards converging between the developed and developing world? Arguments for catching up:
Technology transfer: LDCs dont have to reinvent the wheel but can benefit from the technological innovation of developed countries Factor accumulation: the impact of additional capital on output should be higher in developing countries law of diminishing marginal product.

Actual evidence of convergence is hard to find and there is some evidence that the poor countries are growing more slowly. Also as we have seen, initial growth conditions are not the same.

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LECTURE 2: Comparative Development

Key Points

Even within development countries there exist significant structural differences that have played a key role in their development progress Despite these differences, developing countries face similar challenges. While developing countries can learn from the growth experience of todays developed countries in their early stages, initial growth conditions are not the same and so the growth strategies that were appropriate then are not directly applicable. There is little evidence of convergence in the living levels of the richest and poorest nations.

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