Lecture 2 Comparative Economic Development Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-1

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-2 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.

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-3 Defining the Developing World World Bank Scheme- ranks countries on GNP/capita – LIC ($975 or less) – LMC (between $976 and $3855) – UMC (between $3856 and $11906) – High income countries – OECD- Organisation for Economic Co-operation and Development ($11907 or more)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-4 Table 2.1 Classification of Economies by Region and Income, 2007

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-5 Table 2.1 Classification of Economies by Region and Income, 2007 (continued) (Latin America and the Caribbean) (Sub-Saharan Africa)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-6 Table 2.1 Classification of Economies by Region and Income, 2007 (continued)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-7 Figure 2.1 Nations of the World, Classified by GNI Per Capita

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-8 Measuring Development for Quantitative Comparison across Countries Gross National Income (GNI) Gross Domestic Product (GDP) PPP (Purchasing Power Parity – Calculation of GNI using a common set of international price for all goods and services, to provide more accurate comparisons of living standards) method instead of exchange rates as conversion factors (see figure 2.2)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-9 Figure 2.2 Income Per Capita in Selected Countries

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Table 2.2 A Comparison of Per Capita GNI, 2005

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Some Basic Indicators of Development Health Life Expectancy Education HDI as a holistic measure of living levels – HDI also varies for groups within countries – HDI also varies by region in a country – HDI also reflects rural-urban differences

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Table 2.3 Commonality and Diversity: Some Basic Indicators

Holistic Measures of Living Levels and Capabilities The Traditional Human Development Index Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-13

Origin of HDI: The index was developed in 1990 by Pakistani economist Mahbub ul Haq and Sir Richard Jolly, with help from Gustav Ranis of Yale University and Lord Meghnad Desai of the London School of EconomicsPakistaniMahbub ul HaqYale UniversityMeghnad DesaiLondon School of Economics

Dimensions of HDI Life expectancy at birth, as an index of population health and longevityLife expectancy Knowledge and education, as measured by the adult literacy rate (with two-thirds weighting) and the combined primary, secondary, and tertiary gross enrollment ratio (with one-third weighting) literacygross enrollment ratio Standard of living, as measured by the natural logarithm of gross domestic product (GDP) per capita at purchasing power parity (PPP) in United States dollars.Standard of livingnatural logarithmgross domestic productpurchasing power parityUnited States dollars

Calculation of HDI To construct the index, fixed minimum and maximum values have been established for each of these indicators: Life expectancy at birth: 25 years and 85 years Adult literacy rate: 0 & 100 % Combined gross enrolment ratio: 0% & 100 % Real GDP per capita (PPP$): $100 & $40,000 (PPP$)

Calculation of HDI Individual indices can be computed according to the general formula: Index = Actual x i value – minimum x i value/ Maximum x i value – minimum x i value For eg: the life expectancy at birth in a country is 63.7 years the index of life expectancy for the country would be: Life expectancy index = /85-25 = 40/60 = 0.645

Calculation of HDI The adult literacy rate is 61.0%. Adult literacy index =61.0-0/100-0=0.61 Combined gross enrolment ratio is 63.8% Combined gross enrolment index =63.8-0/100-0=0.638 Education index=2/3(0.61)+1/3(0.638)=0.62 Real GDP is 3452,then adjusted GDP =log(3452)-log(100)/log(40000)-log(100)=0.591 Therefore HDI = ( )/3 =0.619

Categories of HDI: Very High Human Development Index – HDI to 1.0 High Human Development Index – HDI to Medium Human Development Index – HDI to Low Human Development Index – HDI below 0.500

Relationship between individual development and human development in general If two people in a relatively unequal society have an HDI of 0.5 and 0.25, respectively, and both increase their level of development by 0.25, they will affect general development in the same magnitude. In a more equal society, however, an increase in the HDI of the poorer person should count more.

Limitations of HDI:  Not a comprehensive measure of human development. It only focuses on three dimensions of capabilities.  The HDI is not designed to assess progress in human development over a short-term period because two of its component indicators—adult literacy and life expectancy at birth—are not responsive to short-term policy changes.  Like any average country measure, the HDI does not account for variations in human development within the country.  Countries with the same HDI may be very different in how human development is distributed, either from region to region, or from social group to social group.

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Figure 2.3 Human Development Disparities within Selected Countries

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Figure 2.3 Human Development Disparities within Selected Countries (continued)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Table 2.4 Human Development for 23 Selected Countries (2004 Data)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Table 2.4 Human Development for 23 Selected Countries (2004 Data) (continued)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Table 2.5 Human Development Index Variations for Similar Incomes (2004 Data)