ECON 317: ECONOMIC DEVELOPMENT AND GROWTH 1 LECTURE 3 Comparative Development: Differences and Commonalities among Developing Countries (Part 1) Instructor: Dr. Emmanuel Codjoe

Comparative Development Definitional Aspects of Growth and Development: Defining the developing world. The structural diversity of developing economies. Common Characteristics of Developing Countries: Some Obstacles to Development. How developing countries today differ from developed countries in their earlier stages. Are living standards of developing and developed countries converging?

Comparative Development Viewed through the lens of human Development, the global village appears deeply divided between the streets of the haves and those of the have nots. - UNDP Human Development Report, 2006.

Comparative Development  A current feature of the global economy is the extreme contrasts. Take for instance, the differences in output per capita.  Per capita output in the USA is several times higher than those in countries in Africa.  Related to this, is the enormous gaps in welfare, life expectancy, literacy rates, levels of nutrition, to name a few.

Comparative Development  What accounts for these vast differences?  Why have some developing countries made so much progress in closing these gaps, whilst others have not made much progress?  To begin, we start by defining the developing and discussing how development is measured.

Comparative Development Definitional Aspects of Growth and Development: Defining the Developing World  The most common way to define the developing world is by per capita income.  This is an approach used by several international agencies, such as the OECD, World Bank, UN, IMF, etc.  The developing world is also defined by the state of development (or rather, underdevelopment)

Comparative Development Definitional Aspects of Growth and Development: Defining the Developing World  Several measures in summarizing development levels across countries  We focus on two approaches:  Real income per capita adjusted for purchasing power  Human Development Index  The Real Income per capita is based on the World Bank’s country classification scheme

Comparative Development  World Bank uses Gross National Income (GNI) per capita to approximate the real income per capita method.  This is the most common measure of overall level of economic activity; also used as an index of relative economic wellbeing of people in different countries.  The GNI is the total domestic and foreign value added claimed by a country’s residents without making deductions for depreciation of the domestic capital stock.

Comparative Development  The GNI in essence represents GDP plus net factor payments  Note the importance of factor payments in determining how large GNI eventually turns out to be!!!!  However, the computation of the GNI does not account for fluctuations in the exchange rate that is used to convert national currencies into US $.

Comparative Development  Moreover, this conversion does not also taken into account the relative domestic purchasing power of different currencies.  To overcome this problem, the Purchasing Power Parity (PPP) to ensure comparison of the different GNIs and GDPs of countries.

Comparative Development  The PPP is calculated using a common set of international prices for all goods and services produced, valuing goods in all countries in U.S. prices.  In recent computations, the World Bank uses the Atlas method in computing the GNI.  The Atlas method attempts to adjust the GNI for the impact of exchange rates fluctuations and inflation (both domestic and international inflation rates).

Comparative Development The World Bank classifies countries based on estimates for the GNI per capita. The current classification is as follows:  Low-income economies – GNI per capita of $1,045 or less in 2013  Middle-income economies – GNI per capita of more than $1,045 but less than $12,746 in 2013

Comparative Development  High-income economies – GNI per capita of more than $12,746 in 2013  Lower-middle income and Upper-middle income are separated by a GNI per capita of $4,125

Comparative Development  With a number of important exceptions, the developing world consists of countries with low-, lower-middle or upper-middle incomes.  These are grouped by their geographic region (see figure 1), making them easier to identify.

Comparative Development Figure 1: Nations of the World Classified by GNI per capita

Comparative Development Comparing per capital GNI for selected countries, 2008

Comparative Development The Human Development Index (HDI)  Development goes beyond income! Remember?  The HDI is the most ambitious attempt to analyse the comparative status of socioeconomic development systematically and comprehensively.

Comparative Development  The Human Development Index (HDI)  This was undertaken by the UNDP and it attempts to rank countries on a scale of 0 to 1 (1 being the highest human development)

Comparative Development A Holistic Measure of Living Levels- The HDI  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

Comparative Development The Changing Meaning of Development The various views on development from different perspectives – North – South perspectives Meaning of Development Over Time: In the 1950s and 1960s this was largely viewed in income terms.

Comparative Development Meaning of Development Over Time: Specifically, development was regarded as increases in real GDP growth of about 5 – 7 % or similar changes in real GDP per capita sustained over a period of time.

Comparative Development Moreover, we also expect this sustained growth in real GDP to be accompanied by a change in the structure of production and employment in the economy. More precisely we expect that share of agriculture in national output will decline, which is then offset by increases in the share of manufacturing and services in the GDP.

Comparative Development But this notion of development rested on trickle-down economics. The idea that reducing taxes on the rich and businesses would result in benefits, first to the rich and businesses, which eventually ‘trickle down’ to the masses of ordinary people.

Comparative Development The transition from the 20 th to the 21 st century was greeted with a renewed desire to address long standing economic issues present in the developing world from a different perspective and with a new sense of urgency. As we have already noted, standard economic theory emphasized the need to promote growth in GDP and GDP per capita – in other words, wealth creation is highly prized.

Comparative Development Development was now to be seen from a multidimensional perspective. These new perspectives, include the notable but outgoing MDGs, which are now to be replaced with the SDGs, post

Traditional and New Views on Economic Development  Questions  Comments