Transcript Lecture 2 - Comparative Economic Development

EC348 Development Economics
Chapter 2 Lecture Comparative Economic
Development
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Defining the Developing World
World Bank Scheme- ranks countries on GNI/capita
http://data.worldbank.org/about/country-classifications
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Characteristics of the Developing World:
Diversity within Commonality
1. Lower levels of living and
productivity
2. Lower levels of human
capital (health,
education, skills)
3. Higher Levels of
Inequality and Absolute
Poverty
– Absolute Poverty
– World Poverty
4. Higher Population Growth
Rates
– Crude Birth rates
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Income Per Capita in
Selected Countries (2008)
A Comparison of Per
Capita GNI (2008)
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Under-5 Mortality Rates, 1990 and 2005
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Primary School Enrollment and PupilTeacher Ratios, 2010
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Commonality and Diversity: Some
Basic Indicators
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Crude Birth Rates Around the World, 2009
CRUDE BIRTH RATE is the number of resident live births for a specified
geographic area (nation, etc.) during a specified period (year) divided by the total
population (estimated) for that area and multiplied by 1,000.
Calculation: (Number of resident live births / Number of total population) x 1,000
Examples: 180,000 live births in calendar year among nation residents-2,300,000
estimated population in calendar year
(180,000/12,300,000) x 1,000 = 14.6 live births per 1,000 residents in given year
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Characteristics of the Developing World:
Diversity within Commonality
5. Greater Social Fractionalization
6. Larger Rural Populations but Rapid Rural-toUrban Migration
7. Lower Levels of Industrialization and
Manufactured Exports
8. Adverse Geography
– Resource endowments
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The Urban Population in Developed Countries
and Developing Regions
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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
9.
Underdeveloped Financial and Other
markets
– Imperfect markets
– Incomplete information
10. Colonial Legacy and External Dependence
– Institutions
– Private property
– Personal taxation
– Taxes in cash rather than in kind
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Human Development Index
• Recent efforts have tried to come up with an indicator that
summarizes several different “dimensions” of welfare
• The most well-known example is the Human Development Index
(HDI), developed by the United Nations Development Program
(UNDP)
• The HDI combines measures of income, education (enrollment ratio
and literacy), and health (life expectancy), into a single measure
• The HDI is a relative index: the value for each country is between 0
and 1; it conveys the relative position of a given country in the
overall development schedule
• For example, a country with income per capita equal to $9,000, life
expectancy at birth equal to 71, adult literacy equal to 75%, and
enrollment ratio equal to 98% would have an HDI equal to 78
• Countries are classified into different “development groups”
according to the value of their HDI
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Overall Indicators of Development
• Non-economists (and some economists) usually reject the idea
that welfare and poverty should be measured by income alone
• Although income makes people live better, there are other
dimensions of people’s lives that are also important for welfare
• A large array of Social Indicators try to measure these different
dimensions
• Health variables: child mortality, life expectancy, malnutrition,
number of hospital beds per inhabitants, etc
• Education indicators: illiteracy, enrollment rates, average
educational achievement in the population, etc
• Access to service/information indicators: radios or TV’s per
inhabitants, circulation of newspapers, % of households with
access to safe water, etc
Can you think of other indicators?
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Holistic Measures of Living Levels
and Capabilities
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Health
Life Expectancy
Education
HDI as a holistic measure of living levels
• HDI can be calculated for groups and regions in a
country
– HDI varies among groups within countries
– HDI varies across regions in a country
– HDI varies between rural and urban areas
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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
http://mathforum.org/library/drmath/view/52804.html
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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 today’s
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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Looking at the Data
HUMAN DEVELOPMENT INDEX WEB SITE
http://hdr.undp.org/en/statistics/hdi
MULTIDIMENSIONAL POVERTY INDEX
http://www.ophi.org.uk/policy/multidimensional-poverty-index
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Human Development Index
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GNP and GDP Once Again
• GNP – focused on nationality
– Sum of value of finished (or final) goods and services (as
opposed to intermediate outputs) produced by a country’s
economic agents (firms and households) during one year,
regardless of whether production takes place within or outside
the country.
• GDP – geographically focused
– Sum of value of finished (not intermediate) goods and services
produced in a country during one year, regardless of whether
foreigners or that country’s economic agents are doing the
production.
• Alternative definition of GDP (or GNP) – national income
– Instead of determining the size of the economy by counting up
the value of all finished goods and services, one can estimate
GDP by summing value added, industry/sector by
industry/sector. The single industry’s value-added is
distributed as income to the suppliers of labor, capital, and
other factors of production. Accordingly, the summation of all
value added in an economy equals national income.
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The Growth Rate – What it Means
•
The growth rate between two years, such as 2004 and 2005, is given by the
formula:
growthrate 
GDP2005  GDP2004
GDP2004
where GDP2004 is the GDP in 2004 and GDP2005 is the GDP in 2005
•
If you know the growth rate and, for example, if the rate of growth between
2004 and 2005 is 1.3%, then to find the GDP in 2005, multiply the GDP in
2004 by 1.013.
•
In order to figure out the GDP over a longer period of time, say between
2000 and 2005 (a period of 5 years):
GDP2005  GDP2000  (1.013)5
•
notice that the growth rate is the average annualized rate (exactly 1.3%
growth probably doesn’t occur every year; it is the average annual growth
rate or more exactly, the rate that would generate the end year result if one
growth rate had obtained for the entire time)
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A Comparison of Growth Rates
Value of One Unit after t Years
at Growth Rate g
Growth
rate
Doubling time of income
1.3%
About 50 years (around
3 generations)
2.0%
A little over 30 years
3.0%
A little less than 25 years
8.0%
Less than 10 years
8.00
7.00
6.00
growth rate, g 7%
Value in Year t
growth rate, g 4%
5.00
growth rate, g 1%
growth rate, g 10%
4.00
3.00
2.00
1.00
0.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Year
http://www.moneychimp.com/features/rule72.htm
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Looking at Purchasing Power Parity(PPP)
• In the 1970s economists considered if official income
numbers were a good reflection of differences between
countries
• For example, an income of $200 per year would not be
enough to live in the US (not even necessities could be
purchased on this income)
• Thus, converting the income in one country to US dollars
using the market exchange rate gives distorted numbers –
the market exchange rate is not a good reflection of the
purchasing power of a given currency in another country
• For instance, the market exchange rate does not include
goods that cannot be internationally traded, such as food
and some services
Give Examples
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Exchange Rate Conversion
• Many services (e.g., haircuts) and more than a few finished goods
tend not to be traded internationally. This complicates the task of
comparing per-capita GDP in one country with that of another
country, as is required for the systematic analysis of economic
development.
• Suppose, for example, that a haircut in Hanoi, Vietnam costs 60,000
dong and the price of the same haircut in Baltimore is $20.
Converting the former price using the exchange rate of 20, 000 dong
yields $3. Obviously, this discounts the value of nontraded services
produced and consumed in Hanoi (or, equivalently, exaggerates the
value of the same services produced and consumed in Baltimore).
• Purchasing-power parity estimates of GDP correct for this
distortion.
– Standard measure of dollar-equivalent GDP: Multiply GDP, as
expressed in local currency, by exchange rate.
– Purchasing-power parity measure: Evaluate all finished goods
and services using U.S. prices.
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The 2010 New Human Development Index (NHDI),
2008 Data
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The 12 Most and Least Populated Countries and
Their Per Capita Income, 2008
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Are Living Standards of Developing and
Devolved Nations Converging?
• Evidence of unconditional convergence
is hard to find
• But there is increasing evidence of “per
capita income convergence,” weighting
changes in per capita income by
population size
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Relative Country Convergence: World, Developing
Countries, and OECD (cont’d)
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The Basic Question….
Why are they (still) so poor ?????
”Radical” explanations
Exploitation
”Colonial” / historical
explanations
Climate
Overpopulation
Lack of motivation
They are happy
dependence
enough..
Barriers
Natural resources
Bad institutions, Law
and order
Wrong policies
Constraints
Savings and capital
Forex
Human capital
Policy
recommendations…
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Schematic Representation of Leading Theories of
Comparative Development
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Nature and Role of Economic Institutions
• Institutions provide “rules of the game” of economic
life
• Provide underpinning of a market economy
• Include property rights; contract enforcement
• Can work for improving coordination,
• Restricting coercive, fraudulent and anti-competitive
behavior
• Providing access to opportunities for the broad
population• Constraining the power of elites, and managing
conflict
• Provision of social insurance
• Provision of predictable macroeconomic stability
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Concepts for Review
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Absolute poverty
Brain drain
Capital stock
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Convergence
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Crude birth rate
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Dependency burden
Depreciation (of the capital •
stock)
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Divergence
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Economic Institutions
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Free trade
Gross domestic product
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(GDP)
Gross national income (GNI) •
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Human capital
Human Development Index
(HDI)
Incomplete information
Infrastructure
Least developed countries
Low-income countries (LICs)
Middle-income countries
Newly industrializing
countries (NICs)
Purchasing power parity
(PPP)
Resource endowment
Terms of trade
Value added
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