1. Development Economics
Ch. 1 Introduction

2. Development Economics
Studies the economic transformation of developing countries.
Developing Countries: A group of low income countries united by common economic characteristics and often a common history of colonialism.
WDR: pc income threshold $9,000
Of 5.6 billion world pop., 4.5 billion is below the threshold

3. WDR Classification (According to 2007 GNI per Capita)
Low Income Countries: $935 or less
Lower Middle Income Countries: $936 - $3,705.
Upper Middle Income Countries: $3,706 – $11,455.
High Income Countries: $11,456 or more.

4. Selected World Development Indicators
Population
Pop. Age Composition
GNI
PPP GNI
Mio.
2007
Av. Annual Growth %00 – 07
Density per sq. Km.
% ages 0-14
$ billions
$ pc
$ p c
World
6,612
1.2 51 28
52,621
7,958
65,144
9,852 LI
1,296
2.2 61 39
748.8
578
1,935
1,494
LMI
3,437
1.1
100 27
6,485
1,887
15,613
4,543
UMI
823
0.7 20 24
5,749.6
6987
9,765
11,868 HI
1,056 32 18
39,682
37,566
38,133
36,100

5. Selected World Development Indicators
GDP pc Growth %
Life Expectancy at Birth
Adult Literacy Rate %
Carbondioxide Emissions pc per metric tons
06 – 07
Male
Female
Age 15 and older
2004
World
2.6 66 70 82
4.3 LI 56 58 61
0.6
LMI
8.6 67 89
UMI
5.1 74 93
5.5 HI
2.0 76 99
13.1

6. Two strands of the textbook:
Dependency Theories: Emphasise on the international environment that underdeveloped countries are a part of it.
Market Failures and the Potential for gov’t intervention;
Incomplete information
Incentives
Strategic Behaviour

7. Examples
Informal institutions replace the formal constructs in underdeveloped countries,
Widespread externalities are created,
Inequality in distribution of income and wealth, esp. its effect on other economic indicators such as growth, p c income…
Integrating the theoretical and empirical work.

8. Developing Countries Incomplete information, Weak legal structure,
Exposure to developed world,
Resulting strategic and economic considerations.

9. How do we measure “development”?
In a developed society people are well fed, well clothed, possess access to variety of commodities, have some leisure and entertainment, and live in a healthy environment.
Society that is free of discrimination, having political rights and freedoms, intellectual and cultural development, low crime rates…

10. A Yardstick: GNP
P c GNP: per head value of final goods and services produced by the people of a country over a given year.
Captures the state of material well being of a country.
But, development is not just about “income”.

11. Multidimensionality Removal of poverty and undernutrition,
Increase in life expectancy,
Access to sanitation, clean drinking water, and health services,
Reduction in infant mortality,
Increased access to knowledge and schooling, and literacy.
* Economic development is fueled by p c income, but GNP is not always correlated with other indicators.

12. Two questions to understand development:
How average levels of economic attainment (i.e. P c GNP) influence development?
How the distribution of economic attainment influences development?

13. Income and Growth Measurement Issues:
Low p c incomes are an important feature of economic underdevelopment,
Exchange Rate Method: To be able to make a comparison; national currencies are converted into $ and divided by country’s population, BIASED! UNDERESTIMATED!
Underreporting of income (tax collection sys., rural population)
Prices for many goods in all countries are not reflected appropriately in exchange rates (due to prices of non-traded goods and services).
Purchasing Power Parity Measurement of Income: Penn World Tables by Heston Summers => National Accounts denominated in a set of international prices in a common currency.
Market Prices are used to compare highly disparate goods, not efficient in imperfect markets.
GNP ignore costs that arise from externalities => corrected by imputing “shadow prices”.

14. Income and Growth -2-
International Comparison Program: detailed price comparisons for a set of benchmark countries.
Then, price of each item is divided by its corresponding price in the U.S., relative prices are found.
National income for a country is estimated by valuing its output at these prices (by dividing GNP by these relative prices).
PPP reduces in the world income distribution.

15. Historical Experience
Btw – 1985: P c incomes of richest 5% of the world was about 29 times the poorest 5%.
Diverse Growth Experiences: (Parente & Prescott, 1993)
1965 – 1990: p c incomes of East Asian economies grew by 5.5% annually,
1980 – 1993: p c income in China grew by 8.2% annualy,
Growth for 102 countries averages to 1.9% annualy over 1960 – 1985.
P c income fell by 11% during 1980s in L. America,
Much of Africa stagnated or declined during 1980s.
Doubling Time: the number of years it takes for income to double (70/r).

16. Historical Experience -2-
Quah (1993) used p c income data to construct mobility matrices for countries:
First, converted all p c incomes to fractions of the world’s average p c income,
Created categories such as ¼, ½,1, 2, and ∞.
Comparing two points in time.

17. Historical Experince -3-1 2 ∞ 76 12 52 31 10 7 9 20 46 26 24 53 5 95
26% of countries who were between half of the world average and world average in 1962, transited to being world average and twice the world average in 1984.
Middle income countries are exhibiting greatest mobility.
Lowest mobility is between the poorest and richest countries.