Unit 1

Chapter 2,
Part 2
Comparative Economic Development
(based on Todaro and Smith text 11th edition)
 Common Characteristics of
developing 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.
 2.4 Characteristics of the Developing World:
Diversity within Commonality

1. Lower levels of living and productivity

 there is a vast gap in productivity between advanced

economies and developing nations.

 China and India with more than 84% of world’s people,

received only about 46% of the world’s income in 2011.

 low income leads to low investment in education, health,

equipment and infrastructure, which in turn leads to low
productivity and economic stagnation-poverty trap.

 One common misperception is that low incomes result

from a country’s being too small to be self-sufficient.
Figure 2.4 Shares of Global Income, 2008
 Table 2.5 The 12 Most and Least Populated
Countries and Their Per Capita Income, 2008
 2.4 Characteristics of the Developing World:
Diversity within Commonality

2. Lower levels of human capital

 Compared with developed countries, much of the

developing world has lagged in its average levels of
nutrition, health and education.

 The under-5 mortality is 17 times higher in low-income

countries than in high-income countries.

 Low enrolment rate, low schooling attainment and poor

student-teacher ratio are remains serious problems in
South Asia and sub-Saharan Africa.

 under-5 mortality rates improve as mothers’ education

levels rise.
Figure 2.4 Under-5 Mortality Rates, 1990 and
2012
Table 2.6 Primary School Enrollment and
Pupil-Teacher Ratios
Figure 2.5 Correlation between Under-5
Mortality and Mother’s Education
 2.4 Characteristics of the Developing World:
Diversity within Commonality
3. Higher Levels of Inequality and Absolute Poverty

 Globally, the poorest 20% of people receive just 1.5% of

world income.
 The lowest 20% now roughly corresponds to 1.2 billion
people living in extreme poverty on less than $1.25/day-
Absolute poverty.

 Huge gap exist between rich and poor within individual

developing countries.

 The World Bank estimates that the share of the population living on
less than $1.25 per day is 9.1% in East Asia and the Pacific, 8.6% in
Latin America and the Caribbean, 1.5% in the Middle East and North
Africa, 31.7% in South Asia, and 41.1% in sub-Saharan Africa.
Figure 2.6 People Living in Poverty, 1981-2008
 2.4 Characteristics of the Developing World:
Diversity within Commonality

4. Higher Population Growth Rates

 Global population increases from just under 1 billion in

1800 to 1.65 billion in 1900 and to over 6 billion by 2000.
World population topped 7 billion by 2012.

 Rapid population growth began in Europe and other now

developed countries.

 But in recent decades, most population growth has been

centered in the developing world, more than 85%.

 From 1990 to 2008, population in the low-income

countries grew at 2.2% per year, compared to 1.3% in the
middle-income countries and high-income countries grew
at 0.7% per year.
 2.4 Characteristics of the Developing World:
Diversity within Commonality

5. Higher Population Growth Rates

 Crude birth rate The number of children born alive each

year per 1,000 population.

 In sub-Saharan Africa, birth rate is 39 per 1,000—four

times the rate in high-income countries.

 By contrast, the proportion of people over the age of 65 is

much greater in the developed nations.

 Dependency burden The proportion of the total

population aged 0 to 15 and 65+, which is considered
economically unproductive and there-fore not counted in
the labor force.
Table 2.7 Crude Birth Rates Around the
World, 2012
 2.4 Characteristics of the Developing World:
Diversity within Commonality
5. Greater Social Fractionalization

 Fractionalization Significant ethnic, linguistic, and other social

divisions within a country.

 The greater ethnic, linguistic, and religious diversity of a

country, more likely be internal strife and political instability.

 Today, more than 40% nations have diverse populations, in

most cases, small groups face serious problems of
discrimination, social exclusion, systematic disadvantages.

 Conflict can derail what had otherwise been relatively

positive development progress.

 Ethnic and religious diversity need not necessarily lead to

inequality, turmoil or instability.
 2.4 Characteristics of the Developing World:
Diversity within Commonality

6. Larger Rural Populations but Rapid Rural-

to-Urban Migration

 In developing countries, a much higher share of the

population lives in rural areas.

 People living in rural areas are poorer and tend to suffer

from missing markets, limited information, and social
stratification.

 Over the time, hundreds of millions of people are moving

from rural to urban areas.
2.4 Characteristics of the Developing World:
Diversity within Commonality
 2.4 Characteristics of the Developing World:
Diversity within Commonality

7. Lower Levels of Industrialization and

Manufactured Exports

 Industrialization is associated with high productivity and

incomes and has been a hallmark of modernization and
national economic power.

 Generally, developing countries have a far higher share of

employment in agriculture-low share in GDP.

 Along with lower industrialization, developing nations

tended to have a higher dependence on primary exports.
2.4 Characteristics of the Developing World:
Diversity within Commonality
2.4 Characteristics of the Developing World:
Diversity within Commonality
 2.4 Characteristics of the Developing World:
Diversity within Commonality

8. Adverse Geography

 Geography must play important role in problems of

agriculture, public health, and comparative development.

 Resource endowment A nation’s supply of usable factors of

production, including mineral deposits, raw materials, and
labor.

 Conflict over the profits/power, social strife, undemocratic

governance, high inequality, and even armed conflict, in
what is called the ―curse of natural resources.‖

 Problem of environmental uncertainty and poor weather

condition - developing economies.
 2.4 Characteristics of the Developing World:
Diversity within Commonality

9. Underdeveloped Markets

Lack of following aspects for market underdevelopment

1. A legal system that enforces contracts and validates
property rights
2. A stable and trustworthy currency
3. An infrastructure of roads and utilities
4. A well-developed and efficiently regulated system of
banking and insurance
5. Substantial market information
6. Perfect market
7. social norms or peace
 2.4 Characteristics of the Developing World:
Diversity within Commonality

10. Lingering Colonial Impacts and

Unequal International Relations

 Colonial Legacy Most developing countries were once

colonies by European or other foreign powers
 Colonial era institutions often favored extractors of wealth
rather than creators of wealth.
 It harming development then and now
• Exploitation of human and other resources
• Less secure property rights
• Create or reinforce extreme inequality
• Less movement towards domestic institutions
• Less investment in public goods
• Less widespread investment in human capital
 2.4 Characteristics of the Developing World:
Diversity within Commonality

11. External Dependence

 Relatively, developing countries have also been less well
organized and influential in international relations

 More generally, developing nations have weaker bargaining

positions than developed nations in international economic
relations

 Developing nations are also dependent on the developed

world for environmental preservation – Environmental
Dependency.
2.5 How Low-Income Countries Today Differ from
Developed Countries in Their Earlier Stages

1. Physical and Human Resource Endowments

 Some nations are blessed with abundant supplies of

petroleum, minerals, and raw materials for which world
demand is growing.

 Heavy investments of capital are needed to exploit them.

 Human resources endowments - ability of a country to

exploit its natural resources and to initiate and sustain
long-term economic growth - ingenuity gap.

 Paul Romer said - 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.‖
2.5 How Low-Income Countries Today Differ from
Developed Countries in Their Earlier Stages

2. Relative Levels of Per Capita Income and

GDP
 People living in low-income countries have a lower level of
real per capita income.

 Nearly 40% of the population of developing countries is

attempting to subsist at bare minimum levels.

 At the beginning of their modern growth era, today’s

developed nations were economically in advance or had
the advantage of their relatively strong financial position
2.5 How Low-Income Countries Today Differ from
Developed Countries in Their Earlier Stages

3. Climatic Differences
 Almost all developing countries are situated in tropical or
subtropical climatic zones.

 The economically most successful countries are located in

the temperate zone.

 Extremes of heat and humidity in most poor countries

contribute to deteriorating soil quality, rapid depreciation
of many natural goods, low productivity of certain crops,
and the poor health of animals.

 It also cause discomfort to workers, weaken their health,

reduce their desire to engage in physical work, and lower
their levels of productivity and efficiency.
2.5 How Low-Income Countries Today Differ from
Developed Countries in Their Earlier Stages

4. Population Size, Distribution and Growth

 At no time did European and North American countries

have natural population growth rates in excess of 2% per
annum.

 By contrast, the populations of many developing countries

have been increasing above 2.5% even in recent decades.

 Higher person-to-land ratios and other resources.

2.5 How Low-Income Countries Today Differ from
Developed Countries in Their Earlier Stages

5. The Historical Role of International Migration

 Historically, millions of people migrated from regions of

surplus labor into areas of labor shortages.

 For instance, more than 60 million people migrated to the

Americas between 1850 and 1914.

 Today there is far less scope for reducing the pressures of

growing population through massive international emigration
 restrictive immigration laws in modern developed countries
 feel that these migrants are taking jobs away from poor
 brain drain- the emigration of highly educated and skilled
professional and technicians
2.5 How Low-Income Countries Today Differ from
Developed Countries in Their Earlier Stages

6. The Growth Stimulus of International

Trade
 International free trade has been called the ―engine of
growth‖.

 Increased export earnings enabled to borrow funds in the

international capital market at very low interest rates.

 This capital accumulation in turn stimulated further

production and led to more diversified industrial structure.

 But now, developing countries faced formidable difficulties

in trying to generate rapid economic growth on the basis
of world trade.
 2.5 How Low-Income Countries Today Differ from
Developed Countries in Their Earlier Stages

7. Basic Scientific and Technological Research

and Development Capabilities

 High growth can sustained by application of new

technological innovations, based on a rapid advancement in
stock of scientific knowledge and research.

 Research and development (R&D) Scientific investigation

with a view toward improving the existing quality of human
life, products, profits, factors of production, or knowledge.

 Rich countries are interested mainly in development of

sophisticated products, large market and technologically
advance production methods using large input of capitals,
high level of skills and management.
 2.5 How Low-Income Countries Today Differ from
Developed Countries in Their Earlier Stages

8. Efficacy of Domestic Institutions

 Most developed countries at their early stages of economic

development lies in the efficacy of domestic economic,
political, and social institutions.

 They provided relatively broad access to opportunity for

individuals with entrepreneurial drive and providing
incentives for productivity.

 They also typically enjoyed relatively stronger political

stability and more flexible social institutions with broader
access to mobility.
 2.6 Are Living Standards of Developing and
Developed Nations Converging?

 Divergence A tendency for per capita income (or output)

to grow faster in higher-income countries than in lower-
income countries so that the income gap widens across
countries over time.

 Convergence The tendency for per capita income (or

output) to grow faster in lower-income countries than in
higher-income countries so that lower-income countries are
―catching up‖ over time.

 Conditional convergence When countries are

hypothesized to converge not in all cases but other things
being equal (particularly savings rates, labor force growth,
and production technologies).
 2.6 Are Living Standards of Developing and
Developed Nations Converging?

Two important reasons to expect that DCs would be “catching up”

 Technology transfer, or don't have to ―reinvent the wheel‖

• Even if royalties must be paid, it is cheaper to replicate technology
than to undertake original R&D
• Partly because one does not have to pay for mistakes and dead
ends along the way
• Alexander Gerschenkron - ―advantage of backwardness‖

 More rapid capital accumulation

• Where capital intensity is higher, MPc and profitability of
investments would be lower in developed countries
• Impact of additional capital on output would be expected to be
smaller in a developed country
• As a result, we would expect higher investment rates in developing
countries
 2.6 Are Living Standards of Developing and
Developed Nations Converging?

Relative Country Convergence

 Important question - whether poorer countries are growing

faster than richer countries?

 the relative gap in incomes would be shrinking - China’s

average income was just 3% of US in 1980, it was reached
14% of U.S. income by 2007.

 But in the same period, the income of the DRC fell from
about 5% of U.S. levels to just 1%.

 Globally, evidence for relative convergence is weak, even for

the most recent decades.
2.6 Are Living Standards of Developing and
Developed Nations Converging?
 2.6 Are Living Standards of Developing and
Developed Nations Converging?

Absolute Country Convergence

 With the recent rapid growth in China and South Asia,

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
2.6 Are Living Standards of Developing and
Developed Nations Converging?
 2.6 Are Living Standards of Developing and
Developed Nations Converging?

Population-Weighted Relative Country Convergence

 The high growth rate in China and India is particularly

important, because more than one-third of the world’s
people live in these two countries.

 Although it is true that conditions have remained stagnant

or even deteriorated in many of least developed countries.

 For example, the population growth rates of the 49 least

developed countries and other low-income countries are
much higher.

 so their population-weights are increasing over time.

2.6 Are Living Standards of Developing and
Developed Nations Converging?
 2.6 Are Living Standards of Developing and
Developed Nations Converging?

World-as-One-Country Convergence

 An alternative approach to the study of convergence is to

think of the world as if it were one country.

 Studies concluded that global inequality rose significantly.

 The most important about world-as-one-country

convergence study can take into account changes in
inequality within countries as well as between them.
2.7 Long-Run Causes of Comparative Development
 Concepts for Review

 Absolute poverty  Imperfect market

 Brain drain  Incomplete information
 Capital stock  Infrastructure
 Convergence  Least developed countries
 Crude birth rate  Low-income countries (LICs)
 Dependency burden  Middle-income countries
 Depreciation (of the capital stock)  Newly industrializing countries
 Diminishing marginal utility (NICs)
 Divergence  Property rights
 Economic institutions  Purchasing power parity (PPP)
 Fractionalization  Research and development
 Free trade (R&D)
 Gross domestic product (GDP)  Resource endowment
 Gross national income (GNI)  Terms of trade
 Human capital  Value added
 Human Development Index (HDI)  World Bank
Reference

M. P. Todaro and S. Smith (2011), Economic Development,

11 edition, Chapter 2.

Nadeem Ahmad, Deshbandhu College